Using the financial data of the selected company, provide the following ratios:
ID: 2756621 • Letter: U
Question
Using the financial data of the selected company, provide the following ratios: Current Ratio, Quick Ratio, and Total Debt to Total Assets Ratio. Discuss what these ratios mean and what their relevance is compared to industry standards.
Submission Requirements:
Have you provided the calculations for each ratio, as required? Have you analyzed the results from the calculations and compared them to industry standards?
Provide references in APA format. See ITT Tech Virtual Library/Reference (tab)/Frequently Used Categories/Grammar, Writing and Style/APA Formatting and Style Guide.
Explanation / Answer
Tech MahindraLimited ( F.Y 2014-15)
Current ratio: measures the ability of an entity to pay its near-term obligations. "Current" usually is defined as within one year. Though the ideal current ratio depends to some extent on the type of business, a general rule of thumb is that it should be at least 2:1. A lower current ratio means that the company may not be able to pay its bills on time, while a higher ratio means that the company has money in cash or safe investments that could be put to better use in the business.
Formula:
Current Ratio= Current Assets/ Current Liabilities
Current Asset= Rs. 94,889Mn
Current Liabilities= Rs. 42,007Mn
Using the above formula, we get: C.A= 94,889/42,007
= 2.25:1
Industry Standard Current Ratio= 2:1
Analysis- As we can see Current ratio is 2.25:1 that is ideally more than the industry wide standard which is 2:1, hence company is having money to pay of its bills on time and put to better use.
Quick ratio (or "acid test"): provides a stricter definition of the company's ability to make payments on current obligations. Ideally, this ratio should be 1:1. If it is higher, the company may keep too much cash on hand or have a poor collection program for accounts receivable. If it is lower, it may indicate that the company relies too heavily on inventory to meet its obligations.
Formula:
Quick Ratio= Quick Assets/Current Liabilities
Where Quick Assets= cash, marketable securities, and receivables
Quick Asset= Rs. 82,623Mn
Current Liabilities- Rs. 42,007Mn
Hence Q.A= 82,623/42,007
=1.96
Analysis- Quick Ratio of 1.96:1 is greater than ideal industry ratio which 1:1 therefore we can say the company may keep too much cash on hand or have a poor collection program for accounts receivable
Total Debt to Total Assets Ratio— measures the portion of a company's capital that is provided by borrowing. A debt ratio greater than 1.0 means the company has negative net worth, and is technically bankrupt. This ratio is similar, and can easily be converted to, the debt to equity ratio.
Formula:
Total Debt to Total Assets Ratio= Total Debt/ Total Assets
Total Debt= Rs.3,293 Mn
Total assets= Rs.147,392 Mn
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.