Key ratios: static liquidity analysis

Question 1

Name key ratios: static liquidity analysis

Answer 1

Liquidity ratios: longterm assets/ longterm capital <= 1
shortterm assets/ shortterm capital >= 1

Golden balance sheet rule (Investment coverage): Fixed assets/ Total equity <= 1

Asset coverage ratio (Principle of matching maturities): Total equity x 100/ Fixed assets

Golden financing rule (Principle of matching maturities): Current liabilities / Current assets <= 1

Cash ratio (Liquidität 1. Grades): Cash and cash equivalents x 100 / Current liabilities

Quick ratio (Liquidität 2. Grades): (Current assets - inventories) x 100 / Current liabilities

Current ratio (Liquidität 3. Grades): Current assets x 100 / Current liabilities

Working Capital: Current Assets - cash and cash equivalents - current, non-interest bearing liabilities

Net debt: Interest-bearing liabilities (here: loans and borrowings) - cash and cash equivalents

Question 2

Golden balance sheet rule (Investment coverage)

Answer 2

Golden balance sheet rule (Investment coverage): Fixed assets/ Total equity <= 1

> > > Demands that the capital lock-up period does not exceed the period for which the capital has been made available -> assets tied into the company for the longterm are covered by longterm capital

• May become forced to sell assets in order to service current liabilities
• Longterm capital = exclusively by capital or in a broader sense with non-current liabilities

Question 3

Asset coverage ratio (Principle of matching maturities)

Answer 3

Asset coverage ratio (Principle of matching maturities): Total equity x 100/ Fixed Assets

• Counterpart to the investment coverage ratio
• To which fixed assets are covered by equity that remains on the company for an equally longterm

> > > The higher the ratio, the better (means that parts of the current assets are also being financed longterm)

Question 4

Golden financing rule (Principle of matching maturities)

Answer 4

Golden financing rule (Principle of matching maturities): current liabilities/ current assets <= 1

• State that the term between obtaining and repaying capital on the one hand and the use of capital on the other should be in line with each other
• Capital may not be tied up in assets for a longer period that the capital is available to the company

Question 5

Liquidity ratios

Answer 5

Liquidity ratios:

Longterm assets/ longterm capital <= 1

Shortterm assets/ shortterm capital >= 1

Question 6

Liquid/ current assets

Answer 6

Liquid/ current assets include: cash and cash equivalents, marketable securities, total receivables and total inventory

Question 7

Cash ratio (Liquidität 1. Grades)

Answer 7

Cash ratio (Liquidität 1. Grades): Cash and cash equivalents x 100/ Current liabilities

• ratio used for evaluating a companys creditworthiness
• relationship between liquid assets to payment commitments (show the extent to which the current liabilities are covered by current assets)

Question 8

Quick ratio (Liquidität 2. Grades)

Answer 8

Quick ratio (Liquidität 2. Grades): (current assets - inventories) x 100 / current liabilities

• relationship between liquid assets to payment commitments (shows the extent to which the current liabilities are covered by current assets)
• used by bankers to determine how quickly a company can pay off its current liabilities in cases assets need to be converted in to cash
• inventory not included, because inventory may have been paid for and has value, it may not necessarily be converted into cash quickly

> > > Should exceed 100% thus current liabilities are covered by the companys cash position and its total receivables

Question 9

Current ratio (Liquidität 3. Grades)

Answer 9

Current ratio (Liquidität 3. Grades): Current assets x 100/ Current liabilities

• used for evaluating companys creditworthiness
• relationship between liquid assets to payment commitments (shows the extent to which the current liabilities are covered by current assets)

> > > Current ratio of less than 100% is being regarded as threatening the companys existence

Question 10

Working Capital

Answer 10

Working Capital: current assets - cash and cash equivalents - current, non-interest-bearing liabilties

• Expresses the proportion of the current assets working for a company without generating capital costs in the closer sense of the word
• is the current assets with longterm financing

> > > The higher the working capital, the more secure the liquidity position
From an analysts perspective: neg. working capital is positive as suppliers prefinance the companys sale

Question 11

Net debt

Answer 11

Net debt: Interest-bearing liabilities (here: loans and borrowings) - cash and cash equivalents

• shows the amount of a companys debt if all liabilities were to be repaid using liquid funds
  e. g. if a companys liquid funds are greater than its actual debt -> the company is in fact debt-free and it exploits the positive effects on its return on equity via the leverage effect
• However: high level of cash in turn brings a low return and is thus not reasonable from the investors perspective
• Figure should be considered in connection with the cash flow (dynamic gearing)