| Ratio Categories | Formula | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 |
| Liquidity Ratios | |||||||
| Current ratio | Current Assets /Current Liabilities | 0.35 | 0.43 | 0.64 | 0.67 | 0.46 | 0.59 |
| Acid test | (Current Asset-Inventory)/Current Liabilities | 0.31 | 0.38 | 0.63 | 0.65 | 0.45 | 0.57 |
| Collection period | Receivable/credit sales per day | 25.42 | 38.81 | 48.47 | 35.45 | 96.58 | 66.76 |
| Inventory turnover | COGS/Av.inventory | -12.62 | -15.45 | -84.41 | -36.76 | -31.95 | -20.39 |
| Days sales in inventory | 365./inven turnover | -28.92 | -23.63 | -4.32 | -9.93 | -11.43 | -17.90 |
Current Ratio
In evaluating the liquidity position of Transcorp Hotels over a 5-year period, we would be utilising each of the 5 liquidity ratios listed above starting with the current ratio. The current ratio measures a company’s ability to pay short-term obligations or those due within one year. The current ratio measures a company’s ability to pay current, or short-term liabilities (debts and payables) with its current, or short-term, assets, such as cash, inventory, and receivables.
A company with a current ratio of less than 1.00 may not have the capital on hand to meet its short-term obligations if they were all due at once, while a current ratio greater than 1.00 indicates that the company has the financial resources to remain solvent in the short term. However, if this figure is too high it may be indicative of inefficiency in utilising the company’s assets.
Ikeja Hotels would appear to be in a somewhat weak liquidity position. Its liquidity position in 2016 with a current ratio of 0.35 appears quite weak however this position significantly improves in subsequent years reaching a peak of 0.67 in 2019 before commencing a decline in 2020 to 0.46. However, this dip appears to be temporary as 2021 saw an improvement to 0.59. The dip in 2020 can be attributed to the COVID 19 pandemic which significantly impacted the hospitality industry. This fact is evidenced by the 57% drop in revenue in 2020 compared to 2019. Overall, our assessment would suggest that the company improved on its ability to convert revenue to actual cash while also improving its cost efficiency. This may be due to a modification of its sales policy to cash as opposed to credit, reduction in credit payment days and aggressive cash collection of receivables between 2017 and 2019 resulting in the improvement of the liquidity ratio. This position is supported by the trend of cash/cash equivalents position which improved at an average of 54% year on year between 2017 and 2021. The company is advised to seek to further improve its liquidity position by consolidating on aggressive recovery of receivables, cost efficiency expansion of existing revenue streams.
Acid Test Ratio
The Acid Test ratio tells the ability of the company to meet its current liabilities without selling its inventory. Since the calculation does not include inventory, the quick ratio is a more conservative estimation of a firm’s liquidity. A current ratio greater than 1.00 indicates that the company has the financial resources to remain solvent in the short term while a company with a current ratio of less than 1.00 may not have the capital on hand to meet its short-term obligations if they were all due at once. Looking at Ikeja Hotels, over the 5 year review period, its acid test ratio falls below the ideal threshold of 1.0 meaning that long term solvency may be a challenge. Its 2016 ratio of 0.31 is cause for concern. A low ratio could mean that the company is over-leveraged or has ineffective credit or collections policies/practices or is facing issues in growing its turnover. Having said that, the company appears to have improved significantly from 2016 when it had a ratio of 0.31 to 2019 with a ratio of 0.65. As mentioned earlier, the COVID 19 pandemic may have slowed the company’s recovery but we are encouraged by the upward trend of this ratio to 0.57 in 2021. The company is advised to take steps to improve this ratio to at least 1.0 in the coming years.
Collection Period
Average Collection Period Formula
The formula for calculating your average collection period is:
Average Collection Period = (Average Accounts Receivable Balance / Net Credit Sales) x 365
First, calculate your average accounts receivable (AR) balance for that year. You do this by adding your beginning and ending AR balances and dividing by two.
Starting with the average AR balance gives you a better snapshot of the year. If you were to simply use your ending AR balance, your results might be skewed by a particularly large or small year-end balance. Next, divide your average AR balance by your total net credit sales. You only include credit sales in this calculation, not total sales. You leave cash sales out of the formula because cash sales don’t affect your accounts receivables balance. Finally, you multiply the result by 365—the number of days in a year.
Inventory Turnover
Inventory turnover is a financial ratio showing how many times a company turned over its inventory relative to its cost of goods sold (COGS) in a given period. A company can then divide the days in the period, typically a fiscal year, by the inventory turnover ratio to calculate how many days it takes, on average, to sell its inventory.
Average turnover = (opening inventory + closing inventory)/2
Turnover = 365/no of times
