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What will be the message for the management of that company & investors..???
From the standpoint of management the CFO has to take immediate steps to correct the mismatch /imbalance between the Current Assets & Current Liabilities due to the following reasons:-
(1) A delay in turnaround of their Account Receivables
(2) Increase in the Account Payable
(3) Delay in liquidation of Inventories resulting in blocking of WC
(4) Launch of new products & services which may result in increase in the requirement of WC
(5) The CFO with the business heads can examine the reasons & take effective steps to address the same.
Despite ascertaining the reason if the management is unable to resurrect the situation it will reflect poorly on their professional capabilities to run the finance & operations.
From the standpoint of investors it simply means there is mismanagement or lack of effective leadership in being proactive. They can ask the management to show cause & take corrective steps at the earliest to avoid erosion of their capital due to the negative Cash flow.
Ratios can be invaluable tools for making investment decisions. Even so, many new investors would rather leave their decisions to fate than try to deal with the intimidation of financial ratios. The truth is that ratios aren't that intimidating, even if you don't have a degree in business or finance. Using ratios to make informed decisions about an investment makes a lot of sense, once you know how.
There are a large variety of ratios out there, but financial ratios can be broken up into four major categories: profitability ratios, liquidity ratios, solvency ratios and valuation ratios. In this article, we'll take a look at each of the four categories and provide an example of a simple-to-use ratio for each of them.
