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  • BAE

Ability of the entity to meet unexpected demands for working capital


Based on the information provided above, identify and calculate the principal ratios that a financial analyst might use that would give some indication of the following:

a. The entity’s earning ability;

b. The extent to which internal sources have been used to finance asset acquisitions;

c. The rapidity with which accounts receivable are collected;

d. The ability of the entity to meet unexpected demands for working capital;

e. The length of time taken by the entity to sell its inventories. Required: Classify and discuss each of the ratios and explain what these ratios indicate about the entity’s liquidity, asset efficiency and profitability? Students are encouraged to do some research and find out what an increase/decrease in the ratio indicates, what the business could be doing that has resulted in the change, and is this change favorable or not? Where possible you should provide a brief recommendation and lastly do not forget to reference and support your reasonings'. Required: Given that the companies operate in the same industry, write a report of approximately 1000 words explaining what the ratios suggest about the companies’ profitability, efficiency and liquidity. It would be appropriate to classify your report into the three activity groups above and comment on each of these independently. Each activity group should be approximately 500 words Simply writing a comparison of the financial ratios provided in the above table will not incur any marks. You should look carefully at each of the ratios provided and analyze the reason for one entity having a higher or lower ratio than the other. You will need to identify the connection between the ratios as this will reveal a lot of information that will be helpful in answering the question. Do not hesitate to search outside the financial ratios provided. Your analysis should be supported with evidence of research.

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