Liquidity ratios refer to the company’s ability to meet its short term financial obligations. In lay man words it shows whether the company has enough assets to pay of its liabilities. The current ratio shows the margin of liquidity of the company that is if the company has enough cash and assets that can be converted into cash which means liquid assets. These current assets are compared against current liabilities which are the payments that the company shall have to pay in the near future.
Companies are supposed to maintain a current ratio of 1:0.75 and decreasing ratios can mean trouble for the company. Since a decreasing ratio means the company has more payments to make then assets to support those payments. Tesco has a current ratio of 0.57 in 2005 which is not good since they have more than twice as much liability with lesser assets to support it. In 2006 it was 0.50, 2007 it was 0.52, 2008 it was 0.59 and in 2009 it is 0.76. This is not a good indication for an investor since the company’s liabilities are not backed by a good amount of assets. But if we see the growing pattern then we can see the company has implemented a successful strategy and that has brought the ratio up to 0.76 which is attractive for investors since in the current year they have enough assets to back their liabilities and pay the investors their share during an economic meltdown. This growing trend is what brings investors to Tesco and their well thought plus sustainable strategy is their edge that has given them enormous profits and growth in the year 2009.
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