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The ratio has decreased from 1.17:1 1994 to 1.12:1 in 1995. Liquidity has deteriorated in 1995 as compared to 1994. The rule-of-thumb for current ratio is 2:1 and for 1994 and 1995, the current ratio has fallen below the rule-of-thumb. For 1994, the business only has $1.17 of current assets to pay off $1 of its current liabilities. Similarly, in 1995, the business only has $1.12 of current assets to pay off $1 of its current liabilities. This means that for both years the business may have difficulty paying their short term obligations when they fall due. The business faces higher risk in 1994 as compared to 1995 and for both years the business may face insolvency.

This is a stringent test for the liquidity of the firm. On examining the ratios, the business has insufficient funds to cover its quick liabilities in both 1994 and 1995, as the ratio for both years is below the rule-of-thumb ratio of 1:1. In 1994, the business only has $0.55 of quick assets to pay off $1 of its quick liabilities. In 1995, the business has $0.54 of quick assets to pay off $1 of its quick liabilities. The amount of risk the business faces in both years is almost the same. To prevent the business from facing insolvency, the business needs to monitor its liquidity position. When needed, the business may need to plan ahead to request for a short term loan from the bank or negotiate for an overdraft to ensure that they have sufficient funds to pay its creditors.

The ratio measures the leverage or solvency of business. The firm is using lesser gearing for its assets in 1995 as compared to 1994. The gearing ratio in 1994 is 55.17% while in 1995 its 54.25%. Lesser gearing means that the firm is less risky as it has less loans to repay and lesser interest to service, therefore enabling the firm to earn more profits. This also means that the business is facing lesser risk in 1995 as compared

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