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Financial management assisgnment.pptx

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Financial management assisgnment.pptx

  1. 1. Chapter : Financial Statement Analysis Course code :BBA-510
  2. 2.  Liquidity Ratio  A liquidity ratio is a type of financial ratio used to determine a company’s ability to pay its short-term debt obligations. The metric helps determine if a company can use its current, or liquid, assets to cover its current liabilities.  Three liquidity ratios are commonly used – the current ratio, quick ratio, and cash ratio. In each of the liquidity ratios, the current liabilities amount is placed in the denominator of the equation, and the liquid assets amount is placed in the numerator.
  3. 3.  1. Current Ratio  Formula: current ratio = current assets / current liabilities  The current ratio is the simplest liquidity ratio to calculate and interpret. Anyone can easily find the current assets' and current liabilities line items on a company’s balance sheet. Divide current assets by current liabilities, and you will arrive at the current ratio.
  4. 4.  2: Quick ratio  Quick ratio =current assets – inventories/current laibilites  However, the quick ratio only considers certain current assets. It considers more liquid assets such as cash, accounts receivables, and marketable securities. It leaves out current assets such as inventory and prepaid expenses because the two are less liquid. So, the quick ratio is more of a true test of a company’s ability to cover its short-term obligations.
  5. 5.  3: Cash ratio  Cash ratio = (cash + marketable securities) / current liabilities  The cash ratio takes the test of liquidity even further. This ratio only considers a company’s most liquid assets – cash and marketable securities. They are the assets that are most readily available to a company to pay short-term obligations.  In terms of how strict the tests of liquidity are, you can view the current ratio, quick ratio, and cash ratio as easy, medium, and hard.
  6. 6. Leverage Ratio  A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt (loans) or assesses the ability of a company to meet its financial obligations. The leverage ratio category is important because companies rely on a mixture of equity and debt to finance their operations, and knowing the amount of debt held by a company is useful in evaluating whether it can pay off its debts as they come due.
  7. 7.  1:The debt-to-equity (D/E) ratio  Debt-to-equity ratio, which measures a company’s ability to service its debt obligations with respect to shareholder equity is calculated as total debt/total equity.  Formula: total debt / shareholders equity
  8. 8.  2:Debt-to-assets ratio:  Which measures a company’s ability to service its debt obligations with respect to its tangible and intangible assets and is calculated as total debt/total assets. Formula : total debt / total assets
  9. 9.  3:Debt-to-Capital Ratio :  Which measures a company’s ability to service its debt obligations with respect to capital, including shareholder equity and interest-bearing debt.  Formula: long term debt / total capitalization
  10. 10.  A coverage ratio, broadly, is a metric intended to measure a company's ability to service its debt and meet its financial obligations, such as interest payments or dividends . the higher the coverage ratio, the easier it should be to make interest payments on its debt or pay dividends. The trend of coverage ratios over time is also studied by analysts and investors to ascertain the change in a company's financial position.
  11. 11.  Interest coverage ratio :  He interest coverage ratio is a debt and profitability ratio used to determine how easily a company can pay interest on its outstanding debt.  Formula : earnings before interest taxes (ebit) / interest expense

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