A.2 Financial Ratios: Part 1 Flashcards
What do liquidity ratios assess?
Working Capital
Do you have $$$ in the bank today to pay your credit card balance?
Does company have enough available cash to pay
liabilities?
What is the formula for working capital?
Working Capital = Current Assets - Current Liabilities
An increase in the numerator typically results in an ________ in the ratio.
increase
A decrease in the numerator typically results in an ________ in the ratio.
decrease
What is the formula for the current ratio?
Current Ratio = Current Assets / Current Liabilities
What does a current ratio greater than 1.0 imply?
A current ratio greater than 1.0 implies that a company has enough current assets to cover its short-term obligations.
Industry average = 1.50
What does the quick ratio exclude?
- Inventory
- Prepaids
And other less liquid current assets
The quick ratio is also known as what?
Acid-test ratio.
The cash ratio excludes
- Inventory
- Prepaids
- AR
Can be < 1 and still be deemed acceptable
Provide the formula
Quick ratio
Cash (cash equivelents) + Marketable securities + AR / Curr liabilities
Provide the formula
Cash Ratio
Cash (cash equivalents) + Marketable securities / Curr liabilities
What are marketable securities
Highly liquid financial instruments that can quickly be sold as cash
i.e) stocks, bond, etf
Refrencing: Operating Cash Flow
What time frame does operating cash flow typically cover?
Over a time period, not a point in time
What does operating cash flow measuring?
Can cash generated from business operating activities cover curr liabilities
Provide the formula
Operating cash flow ratio
Operating cash flow / curr liabilities
To assess the proportion of a company’s total assets that are tied up in net working capital, we can use what ratio?
Net working capital ratio
Provide the formiula:
Net working capital ratio
Net working capital / total assets
Increase or Decrease?
When current assets decrease and/or current liabilities increase
Decrease
