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ACFI2208
PERFORMANCE MEASUREMENT

Performance measurement
Section – A
a. Liquidity position of Sparkles
The one major thing around which the concept of a modern day organization or company
revolves is money. A liquidity ratio helps to analyse how soon and how quickly a company can
pay off its debts as and when they become liquid (Vaitilingam, 2014). There are various types of
liquidity ratios which help in understanding the different types and degrees of liquidity of a
company. In the context of Sparkes Limited, let us compute and analyse these ratios.
(i) The quick ratio is also known as the acid test ratio- the formula for the quick rate is
the sum of cash, cash equivalents, short term investments and current receivables,
divided by the short term liabilities. This helps in analysing what portion of debt can
be recovered in near absolute future, and only those sources of income are taken into
consideration which can realise cash within a very short span, where a ratio of more
than one is favourable, in our case, in 2017, it was desirable.
2018 2017
Quick
Ratio =
Trade and other receivables +Cash and
short term deposits
Trade and other receivables +Cash and
short term deposits
Current Liabilities Current Liabilities
= 13330+200 11300+1450
16720 9800
= 13530 12750
16720 9800
= 0.81 1.3
Please note that all the figures are in 000’pounds
(i) Current ratio also known as the working capital ratio- current ratio is the ratio of a
company’s current assets to its current liabilities (Needles & Powers, 2013). This
ratio enables to understand what portion of current debts can be paid off by current
assets. A ratio of 1 or more is feasible, in our case, in both the years, it was favorable.
(ii)
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Performance measurement
2018 2017
Current Ratio = Current Assets Current Assets
Current
Liabilities Current Liabilities
= 18030 16050
16720 9800
= 1.08 1.64
Please note that all the figures are in 000’pounds
(iii) Cash Ratio- is the ratio of the company’s cash and cash equivalents to its current
liabilities. This ratio helps in understanding what portion of the current debt can be
paid off by cash in hand and bank and any other cash equivalents.
2018 2017
Cash Ratio = Cash and Cash equivalents Cash and Cash equivalents
Current Liabilities Current Liabilities
= 200 1450
16720 9800
= 0.01 0.15
Please note that all the figures are in 000’pounds
(iv) Working capital- Current Assets- current liabilities computes the working capital of a
company. A positive working capital ensures that there is cash and asset, enough to
pay off the current debts of the company and that it does not need to resort to external
sources of income for the same (Porter & Norton, 2014).
2018 2017
Working capital = Current Assets- Current Liabilities Current Assets- Current Liabilities
= 18030-16720 16050-9800
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Performance measurement
= 1310 6250
Please note that all the figures are in 000’pounds
b. Bankruptcy for Sparkles
Altman Z score is a method of analyzing the risk of failure of an organization by using
probability tools. This score establishes the portability of failure of the organization by
analytically analyzing two years scores. A high score implies lesser chances of failure and a
lower score highlights danger. A score of 2.9 is favorable. The score of 2.6 is favorable for non-
manufacturing company.
Z score= 1.2A+1.4B+3.3C+0.6D+1.0E
Where,
A= Ratio between working capital and total assets
B= Ratio between retained earnings and total assets
C= Ratio between earnings before interest and tax and total assets
D= Ratio between market value of equity and total liabilities
E= Ratio between sales and total assets
Let us analyze the risk of bankruptcy for Sparkes.
A= Ratio between working capital and total assets
2018 2017
4