Liquidity ratios show how liquidity the firm is. Liquidity ratios consider the current assets of the firm and then compare these assets with the current liabilities and analyze the situation of the company if the firm pays off its current liabilities and also its strategy (Johnson, Scholes, and Whittington, 2008).
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Current ratio shows the ratio of current assets to current liabilities. The higher the ratio of current assets, the more liquid the assets of the company are (Ross, Westerfield, and Jordan, 2009). Current ratio is an important financial ratio for the management as well as suppliers and distributors of the firm because this ratio shows the ability of the firm to pay off its current liabilities. Moreover, this ratio shows the liquidity position of the company. Current ratio highlights the position of the company’s current assets with respect to its current liabilities. It is calculated using the following formula
Current ratio is an important ratio in terms of analyzing how liquid the assets are of the company and what would be the position of the company if it pays off its current liabilities. It is preferable to have a higher value of current ratio in comparison to low current ratio and the main reason is that it is better for the firm to be more liquid. In addition this, too much of current ratio shows that the company has too much current assets and in particular inventory piled up and therefore the management uses quick ratio as well to analyze the liquidity position of the firm.
Current ratio of Ryanair
Current ratio of the firm has been constantly rising over the period of assessment. According to the rule of thumb usually current ratio of greater than one is preferred for the firm for gauging the efficiency of the firm. Current ratio is measure in times; hence, current ratio of 1.84 in 2009 refers that Ryanair has 1.84X of current asset to pay off each unit of current liabilities. Further increasing current ratio to 1.98X in 2010 then decreasing to 1.89 in 2011 refers that firm is increased its cash liquidity position to pay of its current liabilities in 2010 whereas its position declined in 2010; however since greater than one it is still in favourable domain. Sectional assessment to explore the reason of rising current ratio reveals that declining current ratio happened in an instance where firm’s current liabilities increased at a greater pace than current asset and similarly 12% in increased in current ratio over 2011-2012 has a reason that though the current asset did not increases with same pace as previous year but current liabilities over 2011-2012 declined its pace of increase; hence, increasing the current ratio. The improvements in current ratios across the years of assessment have been mainly for non-existing of current taxes in 2011 and 2012; however, the fluctuation is caused by fluctuation in derivative financial movement of which had reverse impact on the current ratio.
Current Ratio of easyJet
Current ratio of easyJet increases smoothly across the 2009 to 2011; however, for the latest year of assessment the ratio declined. However, in each year the position of easyJet has remained in the safe domains as in declining ratio situation the firm has retained the capacity of paying of all its current liabilities and still left with minimal percentage of current asset. For the consistent rising current ratio the current assets and current liabilities both have increased however, since the quantum of current asset increase was comparatively higher therefore current ratio increased and hence since in 2012 the current asset declined by 23% over previous year whereas liabilities increased hence the ratio declined. The inconsistent decline in current asset in year 2012 was caused by various component of current assets such as easyJet had none current asset for sale; money market instruments and cash and cash equivalents decline.
The other ratio used to calculate the liquidity position of the company is the quick ratio. Quick ratio calculates the liquidity position of the company but it excludes the level of inventory the company has as at times inventory is not considered as an asset that can be converted into cash quickly (Ross, Westerfield, and Jordan, 2009). The problem with the current ratio is that it includes the inventory which at times cannot be sold very quickly and therefore when the firm needs to convert its assets into cash. So, quick ratio does not include inventory but other current assets of the company in order to negate the issues of current ratio. Following formula is used to calculate the quick ratio
It is better for the firm to be in safer position and therefore it should have a higher liquidity ratio or a higher quick ratio. Higher quick ratio means that the firm has sufficient current assets excluding the inventory with which it can pay off its current liabilities if needed. However too much quick ratio shows that the firm has too many current assets even after excluding the inventory and these assets can be used somewhere else to generate more revenue or profits. Therefore firms need to make sure that they have adequate level of quick ratio; neither the quick ratio should be too high nor it should be too low.
Quick Ratio Of Ryanair
Quick ratio since evaluates the impact of inventory and being service organization Ryanair had considerably less inventory that posed no impact to ratios. Moreover, the trend of quick ratio is very much similar to the current ratio of Ryanair however throughout the period the quick ratio of the airline looks stable.
|Current assets – inventory||3,873.20||3,474.90||11.46%||3474.9||3,060.90||13.53%||3060.9||2,541,002.00||-99.88%|
Quick Ratio Of easyJet
Quick ratios of easyJet are also similar to its current assets of the airline. The firm had no investment in inventory and therefore it is the same as current ratio. This is mainly for being service organization.
|Current assets – inventory||1,197.00||1,648.00||-27.37%||1648||1,491.80||10.47%||1491.8||1,457.90||2.33%|
Cash ratio is the other ratio that is used to analyze the liquidity position of the company. Cash ratio only includes current assets that are very easily converted into cash. These assets are generally cash and marketable securities if the company has (Kaplan, and Atkinson, 1998). Therefore the cash ratio of the firm does not consider all the current assets but only those that can be very easily used to pay off its current liabilities. The formula to calculate the cash ratio is as follows;
The higher the cash ratio, the better the firm is in terms of liquidity position. However the situation is very much similar to quick ratio i.e. too much of the cash ratio means that firm has too much of funds held and these assets can be used somewhere else and revenue and profits can be generated from these current assets. On the other hand, too low cash ratio shows that the firm is not in a good position with regards to the liquidity position and therefore it has to have more cash or marketable securities so that it can pay off its current liabilities in a better way.
Cash ratio of Ryanair
The cash ratio being the litmus test of the position of the firm to pay off its current liabilities at immediate instance and the cash ratio position of Ryanair is very healthy; therefore refers to the sound position of the firm. Ryanair has consistently remained its cash ratio position attractive over the period of assessment. The improvement in the position over 2009-2010 was 23% that declined to 110% over 2010-2011 but then again increased to 21.58% in 2011-2012. This decline and then increase had an impact from dual aspects. For instance, firm had increased cash and current liabilities consistently in 2009 and 2010. Increase in cash for the year over 2010-2011 was much less than increase in liabilities therefore cash ratio declined. On the other hand the cash and cash equivalents increased by 20.11% in 2011 -2012 whereas current liabilities did not show any increase; in fact it decreased. Hence, provided improved cash position.
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Cash ratio of easyJet
The cash position for the easyJet has also been in the positive domain. easyJet relying on cash and marketable securities is capable to pay off all its current liabilities in case of emergency where none other current asset has role to play for any reason. The cash position of the firm is also increasing in positive direction as for years 2009 to 2011; however, it declined for the year 2012. The reason for the mentioned decline has been decline in cash and cash equivalents. Hence, in case easyJet has to pay off its liabilities with cash therefore, the firm only has 70% of the capacity to pay off. Further, the increase in cash ratio across the period of assessment, the ratio’s constituent had mixed impressions as in 2009 rise in cash and cash equivalent was much higher as compare to the rise in current liabilities and similar goes for the year 2010 and 2011.
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