TAT Hong Financial Statement Analysis Part 2B (Liquidity)

When it comes to analyzing of financial statements, it is easier if a systematic approach in interpreting different ratios and numbers is adopted because there are simply just too much information and if there isn't a certain "template", it will be very difficult to start. First, I will start from the company's liquidity which is their ability to meet up current obligations with ease in the event of bad times.

1 Liquidity

1a) Current Ratio
Tat Hong's current ratio in 2005,2006,2007 is 1.36,1.44 and 1.27 respectively. An increase in current ratio signifies the company's improvement in liquidity because they have more assets than liablities. A ratio below one indicates that a company will not be able to pay off it's debt. A decrease in current ratio is worth to take note of especially if it happens frequently. We will take a look at more ratios to give us a clearer picture. Even though Tat Hong's current ratio decreased in 2007 but it is currently still in an expanding phase so some leeway can be given as long as its ratio don't go below one! (Failed)

1b) Quick Ratio
It is similar to current except it excludes inventory from the current assets because as compared to cash and receivables, this is most difficult to convert into cash. Tat Hong's Quick ratio in 2005,2006,2007 is 0.52,0.64,0.53 respectively. Similar to current ratio, the higher the ratio, the better the position of the company. (Failed)

1c) Dynamic Ratio
The dynamic current ratio tells us a more accurate way of assessing short term liquidities than any of the ratios above because it takes into account the company's respective liquidity with regard to both inventory, accounts receivable and accounts payable instead of the full amount. Tat Hong's Dynamic ratio in 2006,2007 is 1.46 and 1.28 respectively. (Failed)

1d) Can the company's operating cash flow cover the total interest bearing debt
The operating cash flow ratio can gauge a company's liquidity in the short term. Using cash flow as opposed to income is sometimes a better indication of liquidity simply because, as we know, cash is how bills are normally paid off. In 2005,2006 and 2007, Tat Hong's coverage is 0.09,0.24 and 0.20 respectively. Comparing with the previous year's ratio, Tat Hong has taken up more interest bearing debt without increasing their operating cash flow to achieve an improved coverage and this is something worth taking note of. (Failed)

Rating Liquidity : (2.5/5)
Tat Hong's dynamic ratio in 2007 has decreased 12% but it is still tolerable as long as the ratio is maintained at a level above 1.2. I will rate it's liquidity level conservatively because it is currently taking up more interest bearing debt without generating sufficient operating cash flow to cover it.