Alafco company financial analysis

2017 2016 2015

9- Current ratio =
2.0 2.1 2
Current Asset/ Current Liabilities 6 2 .94

10- Acid- Test Ratio=

(current Assets -inventory )/ Current 1.8 1.8 2

Liabilities 0 5 .53

11- Cash Ratio =

(Cash Equivalents + Marketable

Securities) / Current liabilities 1.18 1.23 1.62

12- Sales to Working Capital =

2.7 2.6 2
Sales / Average Working Capital 7 6 .46

Current Ratio

The current ratio is an important ratio to understand and analyze the liquidity position of a

company. The current ratio of the company was 2.06 in year 2017 while it was 2.94 in year

2015. The main reason for decline in current ratio was increase in current liabilities as the

current portion of long term liabilities was included current liabilities during the years 2016 and

2017. However, the current ratio is very good as usually benchmark is considered 2:1 and the
company’s current ratio is still higher than the benchmark. This shows that company has

sufficient current assets to pay off its total current liabilities.

Acid Test Ratio

Acid test ratio is calculated to analyze availability of highly liquid assets in case of an immediate

payment of current liabilities. Current assets usually have inventory and prepaid expenses as

well which are often not liquid enough to be converted into cash & cash equivalents during a

three months period. Therefore inventory is reduced from current assets and divided by

current liabilities to achieve acid test ratio. The acid test ratio of the company shows that

company’s liquidity position is very good. The acid test ratio in year 2017 was 1.8 while it was

1.85 in year 2016. This was significantly above the usual benchmark of 1:1 and therefore it can

be concluded that company has sufficient liquid assets to pay off its liabilities in less than three

months.

Cash Ratio

Cash ratio is a step forward from acid test ratio as it includes only cash & cash equivalents and

marketable securities. This ratio is very important for creditors for making decision about the

amount of credit granted to the company. This shows company’s ability to pay in short term.

Company’s cash ratio is very good being 1.18 in year 2017 which shows that company is able to

fully pay off its current liabilities from its cash & cash equivalents and short term marketable

securities. This shows that company’s liquidity position is excellent throughout the past three

years.
Sales to Working Capital

Sales to working capital or working capital turnover ratio is also a very important ratio for

measuring the working capital depletion for purchase of inventory and funding of operations.

The working capital ratio shows the number of times working capital generate sales. High

working capital turnover means that management is very efficient in utilizing its short term

resources for generation of sales review. The company’s ratio of sales to working capital shows

a continuous steady rise in the ratio which shows that management performance has been

increasing and more sales are being generated from working capital each year. The ratio was

2.77 in year 2017, 2.66 in year 2016 and 2.46 in year 2015.