HANDI APPAREL
RATIO

30 June 2010

FINANCIAL STABILITY
(a) liquidity-measures ability to settle debts
Working capital ratio
= CA /CL

Quick Asset ratio
= CA - Inventory / CL

30 June 2009

K denotes ‘000

130K/80K = 1.6:1

151K / 23K = 6.6:1

130K-90K/80K
=0.5:1

51K/23K = 2.2:1

240/ (36+40)/2
= 6.3 times

200K/ (40+40)/2
= 5 times

365/6.3 = 58 days

365/5 = 73 days

580/ (100+90)/2
=580/95
= 6.1 times

465/ (110+100)/2
= 465/105
=4.4 times

60 days

82 days

Debtors' turnover
= net credit sales
(average) debtors

Inventory turnover
= COGS
(average) inventory

Using the financial information given and the ratios above, comment on the liquidity of Handi Apprarel.
Heading

LIQUIDITY

Define heading

Liquidity is the ability of a business to pay its short-term debts when due.

Define each ratio of 2010 only and interpret the ratio

The working capital ratio (WC) of 1.6:1 in 2010 shows that it is just able to meet its current debts due within 12 months.
The WC decreased 5:1 compared with 2009, indicating a decreased liquidity.
The large decrease is due to a decrease in current assets together with an increase in current liabilities mainly,
The quick asset ratio (QA) of 0.5:1 in 2010 shows that the business is facing difficulty in meeting its immediate debts due within 3 months.
The QA decreased 1.7:1 compared with 2009 and caused a liquidity problem because of a larger increase in current liabilities, mainly due to the large increase of creditors despite the drop in inventories balance.
The huge gap between WC and QA is because inventory takes up a large proportion of current assets. The debtors’ turnover of 6.3 times in 2010 shows that, on average, debtors paid 6.3 times during the year, or it took 58 days to