Current Ratio essay
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Looking at the net asset ratios, we note that there was a decrease in Glasgow and a decrease in both London and Leeds offices. This denotes that in Glasgow the extra expenses were well catered for but, on the other hand, we cannot say that it caused profitability as there are many factors that may cause an increase or decrease in the net asset ratio. Thus, its analysis alone cannot solely explain the state of a company without further analysis.
Liquidity ratios are used to gauge whether a business is able to pay its creditors at the appointed time and if its debtors are able to pay duly. Current ratio compares assets that are easily liquefied within twelve months and the liabilities payable within the same period of time. In this case, we see that there was a decrease in the current asset ratio in both Glasgow and London offices and an increase in Leeds offices. If we look at the acid test, the same scenario is evident – a decrease in the ratio in both London and Glasgow offices and an increase in Leeds, according to the acid test. This fact reveals that Leeds offices may be unable to pay their current liabilities on time unlike the others.
No matter how profitable a business may be, unless it pays its creditors on time it is bound to fail Wood (2005, p. 47). Therefore, despite Leeds having a constant profitability it seems unable to pay its debts on time, unlike in the case of Glasgow with a decrease in both current asset and acid test ratios depicting a good liquid to meet its liabilities duly. Taking this into concideration, we can then conclude and define that the best office is Glasgow as it has the best efficient activities, such as the best in stock level maintenance, liquidity maintenances, debtors and creditors management and, to crown it all, its profitability is remarkable.
When we look at the London offices, its profitability is somehow unfavorable as well as its efficiency, but its liquidity appears to be good. Therefore, its efficiency and profitability can be worked on to match its liquidity, and, with doing that, it can improve. But, looking at Leeds, that had started well with the good efficiency but low profitability, it brows everything up with the bad liquidity. Therefore, it should be closed down.
This is because it is overusing the available resources with no better returns. Therefore, if the management closed they would push its resources to Glasgow and London offices, thus yielding more returns.