Analysis of Hargreaves Services Plc Short Term Liquidity & Efficiency Ratios

Introduction

Liquidity ratios are used to determine a company’s ability to pay off its short-terms debts obligations. Using Hargreaves Services Plc financial data from 2006 to 2010.I have the analysis for the companies’ current ratio, acid test, total asset turnover and fixed asset turn over below.

The Current ratio tells us about the relationship between current assets and current Liabilities and how quickly an asset can be turned into cash. Hargreaves Services Plc had a current ratio of 1.09 in 2006 which was poor but significantly increased in 2007 to 1.31, it then fell in 2008 to 1.15, a further decrease in 2009 to 1.06 and has had a significant increase to 1.66 in 2010.

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I would say Hargreaves had a poor current ratio in 2006 and 2009 but currently has a good ratio at 1.66 indicating that for every ?1.66 of Current Assets the firm owns, it owes ?1.00 of Current Liabilities. Looking at this ratio we can see that if all the creditors of the business demanded their money, the business would have enough resources in the form of Current Assets to meet these demands. We can say then that as indicated by the Current Ratio the liquidity of the firm is good, it is managing its working capital effectively. I hence would recommend investors to buy shares.

The Acid Test tells us how Hargreaves Services Plc can meet its short term demand for cash.

Hargreaves Services Plc currently has a reasonable acid test at 0.82 and I would recommend its shares to investors, however the acid test was poor in 2009 and 2008, reasonable in 2007 and was good in 2006.

Hargreaves Services Plc total asset turnover ratio compares its sales with the assets that the business has used to generate its sales.

In 2010 Hargreaves Services Plc had sales of ? 459,779,000 generating a ratio of 1.63 the sales in 2010 were lower than the previous year. Hargreaves Services Plc has made major investments in its assets and is yet to generate their previous level of total turn over.

The fixed asset turnover ratio of Hargreaves Services Plc measures Hargreaves effectiveness in generating sales from its investments in property, plant and equipment. The firm has gradually increased its property, plant and equipment from ? 21,146.000 in 2006 to ? 85,605,000 in 2010.

Recommendation

I recommend Hargreaves Services Plc to investors because it has invested in property, plant and equipment, even if it sales slightly fell this year .I strongly believe it has the potential to achieve positive returns in the years to come.

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