Liquidity ratios
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Liquidity ratios

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Liquidity ratios Liquidity ratios Presentation Transcript

  • Liquidity Ratios
    Current Ratio
    Acid Test Ratio
  • Current Ratio
    Used to Discover if:
    Current assets cover current liabilities or debts if a company needs to liquidate them (assets) in a hurry
    ex. Going out of business
    Current Assets
    Current Liabilities
  • Current Ratio Use
    Good ratio = 2
    Pay attention to industry norm
    Important: Quality of current assets helps determine how quickly they can sell
    View slide
  • Asset Liquidity
    = less liquid depending on who owes company what
    = most liquid
    Receivables
    = somewhat liquid
    = Not very liquid
    Add up the Value
    Inventory
    Short-term Investments
    = somewhat liquid
    = Not Liquid
    Stock
    Office Building
    View slide
  • Current Ratio Use
    Good ratio = 2
    Pay attention to industry norm
    Important: Quality of current assets determine how quickly they can sell
  • Current Ratio Example
    Metal Shop Balance Sheet
    1997:
    $5,310,900/$640,647= 8.23
    1998:
    $19,681,770/$817,692= 24.07
    1999:
    $58,654,548/$1,285,620= 45.62
    Why so high?
    • Cash is most liquid asset
  • Acid Test Ratio
    Also Called Liquidity
    Weakness of current ratio = inclusion of stock (inventory)
    Used to discover if:
    Current assets (without stock) cover current liabilities or debts if a company needs to liquidate them (assets) in a hurry
    Current assets less stock
    Current liabilities
  • Acid Test Ratio Use
    Good ratio = 1
    Pay attention to industry norm
    Important: used with a balance sheet or a moment in time, pay attention to Acid Test over time
  • Acid Test Ratio Example
    Metal Shop Balance Sheet
    1997:
    $(5,310,900-379,506)/ $640,647= 7.7
    1998:
    $(19,681,770-1,022,833)/
    $817,692= 22.82
    1999:
    $(58,654,548-2,684,167)/
    $817,692 = 43.54
    Options:
    • Invest cash in less liquid assets (inventory, business expansion, stocks)
  • Uses of Both
    Used to assess health of company
    Determine risk of loans
    Determine if further investments are needed
    Determine where money should be