Liquidity ratios - ratio analysis, Finance Basics

Liquidity Ratios - Ratio Analysis

It also identified as working capital ratios.  They show capability of the firm to meet its short term maturing financial obligation/recent liabilities as and whenever they fall due.

The ratios are concerned along with current liabilities and current assets.  They involve like:

a) Current ratio =  Current Assets/ Current liabilities

This ratio shows the No. of times the recent liabilities can be paid from recent assets before these assets are exhausted.

The main recommended ratio is 2.0 that is the recent asset should at least be twice as high as recent liabilities

b) Quick/acid test ratios = Current Asset - Stock/Current liabilities

Is an extra refined current ratio that exclude amount of stock of the firm. Stocks are excluded for two (2) basic purposes.

i) They are valued upon historical cost source

ii) They may not be changed into cash very fast

The ratio consequently shows the capability of the firm to pay its recent liabilities from the extra liquid assets of the firm.

c) Cash ratio = (Cash in hand/bank + short term marketable securities)/Current liabilities

This is a refinement of the acid analysis ratio indicating the capability of the firm to meet its recent liabilities from its mainly liquid resources.

Short term marketable securities refers to short term investment of the firm which can be converted into cash within a very short duration as commercial paper and treasury bills.

d) Net working capital Ratio = (Networking Capital x 100)/Net Assets

Whereas Net Assets or Capital employed = Total Assets - Current liability

This ratio shows the proportions of total net assets that are liquid enough to meet the recent liabilities of the firm. It is stated in % term.

Posted Date: 1/30/2013 1:40:37 AM | Location : United States







Related Discussions:- Liquidity ratios - ratio analysis, Assignment Help, Ask Question on Liquidity ratios - ratio analysis, Get Answer, Expert's Help, Liquidity ratios - ratio analysis Discussions

Write discussion on Liquidity ratios - ratio analysis
Your posts are moderated
Related Questions
Partnerships - Types of Business Organisations Defination "The relationship, that exists with persons carrying on a business in common by a view of profit." Formati

Example of Theoretical Value As a result of the purchase of an asset, the income stream will rise by of £1,000 per annum for 25 years.  By assuming a discount rate of 20 perce

Conduct research and explain the companies, their operations, locations, markets, and lines of business. Collect financial statements for the past three years, fiscal or calendar .

Setting a Reorder Point - ROP  Once the order quantity has been determined, the next question to be settled is when to place the order. If an order is released and it takes th

Five years ago, you bought a house for $151,000, with a down payment of $30,000, which meant you took out a loan for $121,000. Your interest rate was 5.75% fixed. You would like to

Explain about the New Issue Market OR Primary Market New issue market is the segment in which new issues are made. In new issue market, new issues may be made in 3 ways name

Dividend Basis Valuation Ownership of shares in entities - The owner to obtain a cash flow consisting of future dividends and the value of a share must correspond to the recen

Constraints of Venture Capital in US 1. Require of rich investors in US, thus inadequate equity capital. 2. Inefficiencies of stock market - NSE is investors and inefficien

From the following cost, production and sales data of Decors Motor Ltd., prepare comparative income statement for three years under (i) absorption costing method, and (ii) marginal

Inventories turnover 8 times 4 times Receivable days 63 days 40 days