Essay: Liquidity and Leverage

Sample Essay

The liquidity of the firm can be evaluated through the current and quick ratios included in Table 1 of this report. The current ratio and quick ratio both indicate that the company is in a good position to pay off its short term obligations. The efficiency of both ratios in 2005 and 2006 was quite low as the current ratio was 0.95 and 0.43 in 2005 and 2006 respectively while 2006 and 2007 witnessed stability in the firm’s liquidity as the current ratio was 1.72 in 2007 and 1.30 in 2009.

The liquidity decreased in 2009 as the current ratio is at a level of 0.79. The quick ratio of the company indicates a similar trend as it is quite low in the earlier years but experiences stability in 2007 and 2008 to decline to a lower level in 2009. The quick ratio indicates how the company can meet its short term obligations without selling off its inventories. The level of inventories in the company is quite low as compared to other current assets therefore the current and quick ratios display similar results.

The leverage of a company indicates the amount of assets which are financed by debt and indicates how the capital of a company is structured. The leverage of Fairfax Media Limited is analysed through the Degree of Financial Leverage – DFL. The higher a company uses debt to finance its assets and operations the higher will be the risk to debt holders (Investopedia).

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