Please answer and briefly discuss relevant points for the following question(s)
ID: 2403183 • Letter: P
Question
Please answer and briefly discuss relevant points for the following question(s) (postings should be no more than a short paragraph or group of paragraphs of 5 to 10 sentences for each question): Sergey Co. has net cash provided by operating activities of $1,200,000. Its average current liabilities for the period are $1,000,000, and its average total liabilities are $1,500,000. Comment on the company's liquidity and financial flexibility given this information. Please answer and briefly discuss relevant points for the following question(s) (postings should be no more than a short paragraph or group of paragraphs of 5 to 10 sentences for each question): Sergey Co. has net cash provided by operating activities of $1,200,000. Its average current liabilities for the period are $1,000,000, and its average total liabilities are $1,500,000. Comment on the company's liquidity and financial flexibility given this information.Explanation / Answer
The two ratios that can be computed in this context are: Current cash debt coverage ratio = Net cash provided by operating activities/ Average current liabilities = 1200000/1000000 = 1.20 Cash debt coverage ratio = Net cash provided by operating activities/Average current liabilities = 1200000/1500000 = 0.80 The first ratio 'Current cash debt coverage ratio' indicates the short term liquidity position of the firm, in that it measures the extent to which the net cash from operating activities is sufficient to meet the current obligations. A ratiio of 1:1 would mean that the firm is having a comfortable liquidity position and that it would be able pay off its current liabilities from the cash flow from operations. Hence, Sergey Co can be considered to have a comfortable liquidity position. The second ratio 'Cash debt coverage ratio' measures the ability of the firm to satisfy its debts. It is useful in predicting bankruptcy. The ratio of 0.80 can be considered a safe level of solvency, as the long term debts are not payable immediately. Hence, on the whole it can be presumed that Sergy Co, has a comfortable liquidity (Short term) and comfortable solvency (Long term) position. A safe liquidity and solvency position affords the firm financial flexibility as it can change its capital structure if need be.