Liquidity
Liquidity Ratio
The Liquidity Ratio includes two kind of ratio, Acid Test Ratio and Current Ratio. The Acid Test Ratio compares current assets to current liabilities excluding liabilities. Current assets normally include cash, marketable securities, accounts receivable and inventories. Current liabilities consists of accounts payable, short term notes payable, short-term loans, current maturities of long term debts, accrues income taxes and other accrues expenses like wages. Take note that the inventory is not included as it is not possible to convert it into cash in a relatively short period of time. An Acid Test ratio with a ratio below 1 would have difficulties in paying up their short- term liabilities with its current assets like cash and accounts receivable. Companies with lower values of Acid Test ratio should consider liquidating some inventories, refinancing short term debts with a long term debt or selling off some fixed assets. However, extremely high ratio can indicate a high cash flow or bad financial management where the company did not make use of their assets wisely by only keeping them aside.
Based on our calculation, the values from the Acid Test Ratio for the Year 2006 and 2007 for Star Publication (Malaysia) Berhad are 5.818 and 6.959 respectively. This indicates that Star Publication (Malaysia) Berhad has a rather high Acid Test Ratio as its value is larger than 1. The company is able to support its long term debt from its current assets. Since there is an increase in the past two years, this could mean that the company is not using their cash assets to invest but rather just keeping the money. The calculated ratio also shows us that the above company has RM5.811 worth of current assets for every ringgit of liabilities. This increased to RM6.959 in 2007 indicating an increasing trend on liquidity.
However, for New Straits Times Press (Malaysia) Berhad, the calculated ratios from the Acid Test are 0.611 and 0.475 for year...