Lesson 5 - Liquidity & Stability Flashcards
How do we measure liquidity?
Working Capital Ratio
How do we measure stability?
Debt Ratio
What is the formula for stability?
TL/TA x 100
What is the formula for WCR?
CA/CL
How should the WCR be written?
The WCR should always be written as a ratio to the number 1. E.g. ____ : 1
How should the debt ratio be written?
The debt ratio should always be written as a percentage.
What does the WCR of 2:1 represent?
This represents good liquidity. It suggests that for every $1 of current liabilities, the business has $2 in current assets. This would be a good result.
What does a WCR of 0.5:1 represent?
This represents poor liquidity. It suggests that for every $1 of current liabilities, the business only has 50c in current assets. This would be a bad result and suggests the business will have difficulty in meeting its short term debts.
Define liquidity.
Liquidity measures the ability of the business to meet its short term debts as they fall due by comparing current assets with current liabilities.
Define stability.
Stability measures the businesses ability to meet its total liabilities and continue operating in the long term.
