In tray Item 2 Assignment Example | Topics and Well Written Essays - 500 words

In tray Item 2 - Assignment Example Based on the factors considered by banks, this report analyses the liquidity and cash flow position of Gainsborough by using Current Ratio, Quick Ratio, Debt Ratio, Interest Coverage Ratio and Cash Flow to Debt Ratio. Current Ratio: The current ratio of the company is 1.04 which shows a good liquidity position. Gainsborough is at a good liquidity position if all its current assets have the potential to be turned around easily. Quick Ratio: A quick ratio is done in order to look at the liquidity position more conservatively. The quick ratio of Gainsborough stands at 0.02 which is at an unacceptably lower level. The company has only very few high liquid assets in its current assets. Debt Ratio: Debt ratio of the company is 0.85 or 85%. This ratio indicates that the company is highly leveraged. Gainsborough has depended on a huge amount of borrowed funds in order to generate assets. At the current liquidity position of the company, it is not of advantage to the bank to grant an increase in the overdraft. The main ratio that the bank should consider in granting overdraft is quick ratio. It is evident that Gainsborough has very few cash equivalent current asset that can help to meet the current liabilities. It should be noted that the company does not maintain any cash or cash equivalent assets that can meet its current level of overdraft position itself. Gainsborough should improve its current assets level. Majority of the current assets of the company are inventories which are not as liquid as that of cash. Therefore, Gainsborough should plough back profits and always maintain a certain level of cash. This in turn will help to improve its quick ratio. Over years, the company should focus on bringing the quick ratio to a level more than 1. The debt ratio of Gainsborough does not show a good picture. In fact, the company uses more borrowed funds than