Reading: Liquidity Ratios
How
Do We Use Ratios to Analyze a Business
•Different
ratios explain different aspects of a company.
•Ratios
are used for the following purposes:
- Evaluating the ability to pay current liabilities and long-term debt
- Evaluating the ability sell merchandise inventory and collect receivables.
- Evaluating profitability
- Evaluating stock as an investment
- Evaluating the ability to pay current liabilities and long-term debt
- Evaluating the ability sell merchandise inventory and collect receivables.
- Evaluating profitability
- Evaluating stock as an investment
How
Do We Use Ratios to Analyze a Business
Evaluating
the Ability to Pay Current Liabilities
•Working
capital measures the ability to meet short term obligations with current
assets. Working capital is defined as follows:
Current
Ratio
•The
most widely used ratio is the current ratio. This ratio measures a company’s
ability to pay its current liabilities with its current assets.
Cash
Ratio
•The
cash ratio helps determine a company’s ability to meet its short-term
obligations.
Acid-Test
(or Quick) Ratio
•The
acid-test ratio (sometimes called the quick ratio) tells us whether a company
can pay all its current liabilities if they come due immediately.
Last modified: Tuesday, August 14, 2018, 8:39 AM