3.5 Profitability and Liquidity Ratio Analysis: Activity B
1. Calculate BP's current ratio.
Current Ratio = current assets/current liabilities
Current Ratio = 68,136/58,546
Current Ratio = 1.16
2. Calculate BP's acid test ratio.
Acid Test Ratio = (current assets - inventory)/current liabilities
Acid Test Ratio = (68,136 - 26,554)/58,546
Acid Test Ratio = 0,71
3. Comment on BP's liquidity.
Considering that the result of the acid test ratio for BP is less than 1, indicates that the
company BP does not actually have sufficient liquid assets to pay off their current liabilities.
This may be due to the large amount of debts they owe to their suppliers as well as the small
amount of cash in hand, making them unable to pay off their short-term debts. In addition,
the acid test ratio disregard the inventories owned by BP as it might not be as easy to
liquidify in the short run. All in all, from the acid test ratio, it can concluded that BP is facing
financial difficulties as it is unable to pay off their short-term debts, mainly to their suppliers.
4. Explain why it would be useful to BP's stakeholders to have liquidity ratio results
for the previous year and for other oil companies.
Liquidity ratio is the ratio that helps measure a company's ability to pay off their short-term
debts. In this context, BP is a well-known PLC that also releases sufficient information for its
company to be examined using multiple liquidity ratios. In this case, the importance for
stakeholders to have access to BP's and other oil companies' liquidity ratio results is
examined.
One reason it would be useful for BP's stakeholders to have access to the liquidity ratio
results for the previous year and for other oil companies would be having the ability to
compare. By having results from the previous year, stakeholders can make a comparison
whether or not the financial difficulties faced by BP has reduced or worsened overtime. As
for having results from other companies could help identify whether or not financial
difficulties faced by BP is a normal occasion faced by oil companies in general. For internal
stakeholders working for BP, having results from multiple companies can help them ensure
their job security. This means if employees were to know the difficulties faced by the
company, they can find other jobs as a backup in case the company goes bankrupt.
Employees may also change workplaces if they were to know other oil companies are in a
better position, with hopes of an increased wage.
Another reason it would be useful would be to identify whether or not BP is a company that
is worth borrowing money for. For instance, as a supplier of an oil company, by looking at
the liquidity ratio results of multiple companies, suppliers can decide whether or not
becoming suppliers for BP would benefit them. In this context, if BP were to not have
insufficient liquid assets, suppliers would highly likely be reluctant to provide more supplies
as BP is not capable of paying it. Thus, liquidity ratios also help suppliers or investors in
making a decision whether or not to supply resources or provide money.
Overall, liquidity ratio results of a company and its competitors are really important for all
stakeholders as it provides an information on a company's financial situation overtime as
well as when compared to their competitors. It is also considered useful as it helps
employees get an insight to the situation of the business they are working for and help
investors/suppliers make decisions.
1. Calculate BP's current ratio.
Current Ratio = current assets/current liabilities
Current Ratio = 68,136/58,546
Current Ratio = 1.16
2. Calculate BP's acid test ratio.
Acid Test Ratio = (current assets - inventory)/current liabilities
Acid Test Ratio = (68,136 - 26,554)/58,546
Acid Test Ratio = 0,71
3. Comment on BP's liquidity.
Considering that the result of the acid test ratio for BP is less than 1, indicates that the
company BP does not actually have sufficient liquid assets to pay off their current liabilities.
This may be due to the large amount of debts they owe to their suppliers as well as the small
amount of cash in hand, making them unable to pay off their short-term debts. In addition,
the acid test ratio disregard the inventories owned by BP as it might not be as easy to
liquidify in the short run. All in all, from the acid test ratio, it can concluded that BP is facing
financial difficulties as it is unable to pay off their short-term debts, mainly to their suppliers.
4. Explain why it would be useful to BP's stakeholders to have liquidity ratio results
for the previous year and for other oil companies.
Liquidity ratio is the ratio that helps measure a company's ability to pay off their short-term
debts. In this context, BP is a well-known PLC that also releases sufficient information for its
company to be examined using multiple liquidity ratios. In this case, the importance for
stakeholders to have access to BP's and other oil companies' liquidity ratio results is
examined.
One reason it would be useful for BP's stakeholders to have access to the liquidity ratio
results for the previous year and for other oil companies would be having the ability to
compare. By having results from the previous year, stakeholders can make a comparison
whether or not the financial difficulties faced by BP has reduced or worsened overtime. As
for having results from other companies could help identify whether or not financial
difficulties faced by BP is a normal occasion faced by oil companies in general. For internal
stakeholders working for BP, having results from multiple companies can help them ensure
their job security. This means if employees were to know the difficulties faced by the
company, they can find other jobs as a backup in case the company goes bankrupt.
Employees may also change workplaces if they were to know other oil companies are in a
better position, with hopes of an increased wage.
Another reason it would be useful would be to identify whether or not BP is a company that
is worth borrowing money for. For instance, as a supplier of an oil company, by looking at
the liquidity ratio results of multiple companies, suppliers can decide whether or not
becoming suppliers for BP would benefit them. In this context, if BP were to not have
insufficient liquid assets, suppliers would highly likely be reluctant to provide more supplies
as BP is not capable of paying it. Thus, liquidity ratios also help suppliers or investors in
making a decision whether or not to supply resources or provide money.
Overall, liquidity ratio results of a company and its competitors are really important for all
stakeholders as it provides an information on a company's financial situation overtime as
well as when compared to their competitors. It is also considered useful as it helps
employees get an insight to the situation of the business they are working for and help
investors/suppliers make decisions.
