In financial statement analysis, current ratio helps to understand the ability of a firm to pay its short term debts. A higher level of current ratio shows that the company has a sufficient amount of present assets for example receivables, cash, and inventory to pay its current liabilities (Joshi & Ramapati, 2020). The quick ratio is sometimes called as the acid ratio, it is the amount of cash in hand to pay its short term obligations (Shukla & Nerlekar, 2016). Here will compare the current ratios and acid ratios of Nestle and Uniliver for the years 2017 and 2018.
During 2017 the current assets of Nestle were CHF 31884 M, and Current liabilities were CHF 38189 M, while the cash in hand was CHF 7938 M, in 2018 Current assets were CHF 41003 M, current liabilities CHF 43030 m while cash was CHF 4500 million. On the other hand, Uniliver had current assets € 16983 million and € 15481 m in 2017 and 2018 respectively. Current liabilities of the company were € 7968 m and € 3235 m in 2017 and 18 respectively. While the cash in hand was € 3317 m and € 3230 million.
The current ratio of Nestle in 2017 was 0.83 while Uniliver had 2.12. A current ratio of less than 1 is not an ideal number. The higher current ratio is also not good because it means the company has idol cash and receivable that needs to be invested (Yasodh et al., 2019). Similarly, in 2018, the current ratio of Nestle was 0.95 while Uniliver had 4.78. Uniliver was closed to 1 that is a good sign for the company (Simanjuntak et al, 2019). On the other hand, Uniliver had 4.78 that means Uniliver had 4 times more current assets to disburse their short-range liabilities. Higher current ratio means the company has a higher amount of idol cash that needs to be invested (Ma, 2017).
The quick ratio of Unilever was 0.4 and 0.99 in 2017 and 2018 respectively. That means the company has enough cash and equivalents to pay its short term debts. According to TJ, M.P., RS, M.S. and RT, M.S., (2020) that shows better working capital of the company. On the other hand, Nestle had quick ratios of 0.2 and 0.1 in 2017 and 2018 respectively. As we examined the current ratio of the company didn’t reach to 1 during the period so the quick ratio was also lower (Hilal & Samono, 2019 ). It means the company may face challenges if its short term liabilities reach maturity (Öztürk & Karabulut, 2018).
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Shukla, A. and Nerlekar, D., 2016. Fundamental Analysis of Listed FMGC with the Help of Ratio’s. Available at SSRN 2776897.