Examples of current ratio in the following topics:
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- Current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months.
- If current liabilities exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term obligations.
- This can allow a firm to operate with a low current ratio.
- If all other things were equal, a creditor, who is expecting to be paid in the next 12 months, would consider a high current ratio to be better than a low current ratio.
- Use a company's current ratio to evaluate its short-term financial strength
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- Liquidity, a business's ability to pay obligations, can be assessed using various ratios: current ratio, quick ratio, etc.
- The current ratio, which is the simplest measure and is calculated by dividing the total current assets by the total current liabilities.
- The quick ratio, which is calculated by deducting inventories and prepayments from current assets and then dividing by current liabilities--this gives a measure of the ability to meet current liabilities from assets that can be readily sold.
- The operating cash flow ratio can be calculated by dividing the operating cash flow by current liabilities.
- The liquidity ratio (acid test) is a ratio used to determine the liquidity of a business entity.
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- Financial ratios may be used by managers within a firm, by current and potential shareholders (owners), and by a firm's creditors.
- A publicly traded company's stock price can also be a variable used in the computation of certain ratios, such as the price/earnings ratio.
- The current ratio is used to determine a company's liquidity, or its ability to meet its short term obligations.
- When comparing two companies, in theory, the entity with the higher current ratio is more liquid than the other.
- However, it is important to note that determination of a company's solvency is based on various factors and not just the value of the current ratio.
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- The Acid Test or Quick Ratio measures the ability of a company to use its assets to retire its current liabilities immediately.
- A company with a Quick Ratio of less than 1 cannot pay back its current liabilities.
- Quick Ratio = (Cash and cash equivalent + Marketable securities + Accounts receivable) / Current liabilities.
- Acid test often refers to Cash ratio instead of Quick ratio: Acid Test Ratio = (Current assets - Inventory) / Current liabilities.
- Note that Inventory is excluded from the sum of assets in the Quick Ratio, but included in the Current Ratio.
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- Financial ratios may be used by managers within a firm, by current and potential shareholders (owners) of a firm, and by a firm's creditors.
- Acid-test ratio (Quick ratio): (Current assets - Inventory - Prepayments) / Current liabilities
- Times interest earned ratio (Interest Coverage Ratio): EBIT / Annual interest expense
- Return on assets (ROA ratio or Du Pont Ratio): Net income / Average total assets
- Ratio analysis includes profitability ratios, activity (efficiency) ratios, debt ratios, liquidity ratios and market (value) ratios
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- The price-to-book ratio is a financial ratio used to compare a company's current market price to its book value.
- The price-to-book ratio, or P/B ratio, is a financial ratio used to compare a company's current market price to its book value.
- The second way, using per-share values, is to divide the company's current share price by the book value per share (i.e. its book value divided by the number of outstanding shares).
- As with most ratios, it varies a fair amount by industry.
- It is also known as the market-to-book ratio and the price-to-equity ratio (which should not be confused with the price-to-earnings ratio), and its inverse is called the book-to-market ratio.
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- The debt ratio is expressed as Total debt / Total assets.
- Financial ratios are categorized according to the financial aspect of the business which the ratio measures.
- Debt ratios measure the firm's ability to repay long-term debt.
- It is the ratio of total debt (the sum of current liabilities and long-term liabilities) and total assets (the sum of current assets, fixed assets, and other assets such as 'goodwill').
- Like all financial ratios, a company's debt ratio should be compared with their industry average or other competing firms.
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- The Target Payout Ratio, or Dividend Payout Ratio, is the fraction of net income a firm pays to its stockholders in dividends.
- Investors seeking high current income and limited capital growth prefer companies with high Dividend Payout Ratios.
- However investors seeking capital growth may prefer lower payout ratios.
- The Target Payout Ratio depends on what investors the management of a company are trying to attract, and what current investors' expectations are.
- High growth firms in early life generally have low or zero payout ratios.
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- Ratio analysis consists of calculating financial performance using five basic types of ratios: profitability, liquidity, activity, debt, and market.
- Financial ratios may be used internally by managers within a firm, by current and potential shareholders and creditors of a firm, and other audiences interested in understanding the strengths and weaknesses of a company, especially compared to the company over time or compared to other companies.
- Activity ratios, also called efficiency ratios, measure the effectiveness of a firm's use of resources, or assets.
- Market ratios are concerned with shareholder audiences.
- Classify a financial ratio based on what it measures in a company
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- The debt-to-equity ratio (D/E) is a financial ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets.
- Quoted ratios can even exclude the current portion of the LTD.
- A similar ratio is the ratio of debt-to-capital (D/C), where capital is the sum of debt and equity:D/C = total liabilities / total capital = debt / (debt + equity)
- This is summarized by their leverage ratio, which is the ratio of total debt to total equity.
- A higher ratio indicates more risk.