Liquidity ratios (37)
- Ability to satisfy short-term obligations as they come due
- Should use the following ratios collectively
- Current ratio (CA/CL) (38)
- How a company can maximize current assets on its balance to satisfy its current debt and payables
- Quick ratio (39)
- Excluding inventory from current asset
- Indicate the company’s ability to instantly use its near-cash assets
- Cash ratio (40)
- Excluding inventory and receivables
- ability to repay its short-term debt with cash or near-cash resources, such as easily marketable securities.
- Current ratio (CA/CL) (38)
Solvency ratios (37)
- Ability to satisfy long-term obligation
- Should use the following ratios collectively
- Long-term debt-to-equity (38)
- High → risk as company must meet principal and interest on its obligations.
- Total debt-to-equity (D/E) (39)
- Used to evaluate a company’s financial leverage
- Reflects the ability of shareholder equity to cover all outstanding debts in the event of a business downturn.
- Debt ratio (40)
- Company may be putting itself at a risk of default on its loans if interest rates were to rise suddenly.
- Financial leverage (41)
- the use of debt to acquire additional assets.
Limitation
- Limitation by difference in accounting standards
- Different industries
- Significant judgement
- Balance sheet data is measured at a single point in time
Notes:
- Receivable
- are debts owed to a company by its customers for goods or services that have been delivered or used but not yet paid for.