I need help with part b of the question Despite being a publicly traded company

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I need help with part b of the question

Despite being a publicly traded company only since 1987, Northland Cranberries of Wisconsin Rapids, Wisconsin, is one of the world's largest cranberry growers. During its short life as a publicly traded corporation, it has engaged in an aggressive growth strategy. As a consequence, the company has taken on significant amounts of both short-term and long-term debt. The following information is taken from recent annual reports of the company. (a) Evaluate the company's liquidity by calculating and analyzing working capital and the current ratio. (b) The discussion of the company's liquidity, shown below, was provided by the company in the Management Discussion and Analysis section of the company's annual report. Comment on whether you agree with management's statements, and what might be done to remedy the situation.

Explanation / Answer

The current ratio of a company reflects it's abilities to pay of the liabilities with it's assets. A high current ratio, preferably more than 1 is preferrable since it means that the company has a good liquidity position to pay of it's liabilities. A low ratio is not a good sign for the business but does not mean that the company will go under. A low current ratio is generally seen when the company takes on some form of short term debt to finance a project. If the project provides returns before the short term debt is due, then there is no issue for the firm. Another case where a low current ratio is justifiable, is when the inventory turns are very high and this outpaces the rate at which the accounts payable are due

In the given case, the short term borrowing that has been taken to fund an aquisition seems to have an impact on the current ratio. Since it is mentioned that the company has no significant amounts of inventories and that it receives payments for crops sold in cash, it is safe to interpret that there is no major on the liabilites part except the short term borrowing. The low current ratio is thus does not paint the true picture for this company

Given the explanation, a current ratio of less than 1 is not a great sign In order for the company to improve it's current ratio, it advisable that the company clears it's short term borrowings. One option is to pay of these short term liabilities. The short term borrowings can also be converted into an increase in the shareholder's equity or converted into a long term loan. This will reduce the current liabilities and thus improve the current ratio.

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