Examples of liquidity ratio in the following topics:
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- Liquidity, a business's ability to pay obligations, can be assessed using various ratios: current ratio, quick ratio, etc.
- For a corporation with a published balance sheet, there are various ratios used to calculate a measure of liquidity.
- The liquidity ratio (acid test) is a ratio used to determine the liquidity of a business entity.
- Liquidity ratio expresses a company's ability to repay short-term creditors out of its total cash.
- The liquidity ratio is the result of dividing the total cash by short-term borrowings.
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- Liquidity ratio expresses a company's ability to repay short-term creditors out of its total cash.
- The liquidity ratio is the result of dividing the total cash by short-term borrowings.
- Acid Test - a ratio used to determine the liquidity of a business entity.
- The current ratio is an indication of a firm's market liquidity and ability to meet creditor's demands.
- High liquidity means a company has the ability to meet its short-term obligations.
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- Ratio analysis consists of calculating financial performance using five basic types of ratios: profitability, liquidity, activity, debt, and market.
- Most analysts think of financial ratios as consisting of five basic types:
- 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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- Financial ratios are categorized according to the financial aspect of the business which the ratio measures .
- 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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- In finance, the Acid-test (also known as quick ratio or liquid ratio) measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately.
- Cash and cash equivalents are the most liquid assets found within the asset portion of a company's balance sheet.
- 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.
- The higher the ratio, the greater the company's liquidity will be (better able to meet current obligations using liquid assets).
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- Ratios can identify various financial attributes of a company, such as solvency and liquidity, profitability (quality of income), and return on equity.
- 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.
- As with quality of sales, high levels for this ratio are desirable.
- 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.
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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.
- Like all financial ratios, a company's debt ratio should be compared with their industry average or other competing firms.
- Companies with high debt/asset ratios are said to be "highly leveraged," not highly liquid as stated above.
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- In addition to using financial ratio analysis to compare one company with others in its peer group, ratio analysis is often used to compare the company's performance on certain measures over time.
- Creditors and company managers also use ratio analysis as a form of trend analysis.
- For example, they may examine trends in liquidity or profitability over time.
- Trend analysis using financial ratios can be complicated by the fact that companies and accounting can change over time.
- When examining historical trends in ratios, analysts will often make adjustments to the ratios for these reasons, perhaps performing some ratio analysis in which they segment out business segments that are not consistent over time or they separate recurring from non-recurring items.
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- External users, such as investors and creditors, use the financial statements to gauge the future profitability and liquidity of a company.
- Two types of ratio analysis are analysis of risk and analysis of profitability:
- Risk analysis consists of liquidity and solvency analysis.
- Liquidity analysis aims at analyzing whether the firm has enough liquidity to meet its obligations.
- One technique used to analyze illiquidity risk is to focus on ratios such as the current ratio and interest coverage.
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- Fixed-asset turnover is the ratio of sales to value of fixed assets, indicating how well the business uses fixed assets to generate sales.
- This can be compared with current assets, such as cash or bank accounts, which are described as liquid assets.
- Fixed-asset turnover is the ratio of sales (on the profit and loss account) to the value of fixed assets (on the balance sheet).
- Generally speaking, the higher the ratio, the better, because a high ratio indicates the business has less money tied up in fixed assets for each unit of currency of sales revenue.
- A declining ratio may indicate that the business is over-invested in plant, equipment, or other fixed assets.