Essay on Ghim Li's 2018 Liquidity Ratios: Healthy Current Ratio of 1.10

Introduction

The liquidity ratios display the ability of the firm to meet or pay its short-term bills and obligations (Saleem et al., 2011). Ghim Li’s current ratio in 2018 was healthy at 1.08, showing that regardless of other factors, it managed to cover its liabilities. The current ratio even increased to 1.10 in 2018, which means that the responsibility and total assets of the firm had risen drastically compared to the previous year. Short-term obligations were not a big issue for the company in the year 2018. The average current ratio of Ghim Li, therefore, proves that the company is still financially stable, and it can easily cover its liabilities.

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Financial Leverage Analysis (Bankruptcy Threat)

The asset turnover ratio enables investors to comprehend how effective a firm is utilising its assets to produce more sales. The asset turnover ratio of Ghim Li company was approximately 1.1674 in 2018 and declined to 1.0225 in 2019. The decrease in the asset turnover ratio of Ghim Li showed the company is not using its assets well to generate more sales.

Ghim Li’s Profitability Ratios Analysis

Ghim Li’s profit margin was calculated to be 1.3260% in 2018 and decreased to 0.2589% in the following year. The low-profit margin makes the firm unattractive to investors hence leading to a decline in the growth of its resources. The decrease in the profit margin showed that the production cost averagely throughout the years is no reasonable compared to the selling price of their commodities. The gross profit margin of the company grew from 13.997% in 2018 to 15.617% in 2019. The gross profit shows the profit a firm generated after subtracting the costs related to making and selling its commodities, or the coats related to giving its services. The increase in the gross profit margin showed that Ghim Li has a high operating profit margin hence good net income. The margin still shows the potential of the company to grow despite having a decrease in the profit margins in the year 2018 and 2019.

The return on assets ratio (ROA) of Ghim Li decreased from 0.021208 in 2018 to 0.0051562 in 2019. The decrease in the return on assets still displays the poor management at the firm since this ratio evaluates how effectively a firm can gain a return on its business activities in assets (Khadafi et al., 2014). Ghim Li might have over-invested in the available assets hence failed to generate revenue growth with the two years; this is an indication that the firm is in an economic crisis. The return on equity (ROE) of the firm also declined within the period of the two years, where in 2018, the ratio was 0.0673 and decreased to 0.017434 in 2019. The return on equity evaluates how much a business can make with a firm’s investors’ equity. The decrease in the return of equity ratio indicates that Ghim Li is not utilising its investors appropriately, and fewer investors might cause the reason within the period of the two years. Another problem is because the firm is tackling a high-priced acquisition and for financing the purchase using a large number of dividends (Khadafi et al., 2014). Therefore, Ghim Li is not efficient in returning profit.

The quick ratio portrays the level of cash and other available assets that are readily convertible into cash in relation to the short-term responsibilities of a business. The quick ratio of Ghim Li company remains constant within the period of the two years, which are 2018 and 2019. The quick ratio is calculated as 0.92, which gives a general ratio of 1:1 within the two years. This shows that the company is in a position to settle half of its possible liabilities quickly.

Conclusion

The days inventory gives information on the number of days a firm took to sell its inventory during recent years (Demeter et al., 2011). Ghim Li’s days of inventory increased 37.6 days in 2018 to 49.7 days in 2019. The increase in the number of days in inventory shows that Ghim Li is not capable of quickly converting its inventory into profitable sales. The management of Ghim Li needs to come up with proper strategies to improve the sales of the company’s products since its general performance is below average.

References

Asmi, T.L., 2014. Current Ratio, Debt To Equity Ratio, Total Asset Turnover, Return On Asset, Price To Book Value Sebagai Faktor Penentu Return Saham. Management Analysis Journal, 3(2). www://journal.unnes.ac.id/sju/index.php/maj/article/view/3953

Demeter, K. and Matyusz, Z., 2011. The impact of lean practices on inventory turnover. International Journal of Production Economics, 133(1), pp.154-163. www.sciencedirect.com/science/article/pii/S0925527310000393

Khadafi, M., Heikal, M. and Ummah, A., 2014. Influence analysis of return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and current ratio (CR), against corporate profit growth in automotive in Indonesia Stock Exchange. International Journal of Academic Research in Business and Social Sciences, 4(12). www://repository.unimal.ac.id/1351/

Moridipour, H. and Mousavi, Z., 2014. Relationship between inventory turnover with gross profit margin and sales shocks. International Research Journal of Applied and Basic Sciences, 8(8), pp.1106-1109. www://pdfs.semanticscholar.org/85cd/db976e23ec7ff94d6e06e7a3fd1ffb2a8468.pdf

Saleem, Q. and Rehman, R.U., 2011. Impacts of liquidity ratios on profitability. Interdisciplinary journal of research in business, 1(7), pp.95-98. www://www.academia.edu/download/42820999/idjrb7n9.pdf