Liquidity Measures

Question 1

What does the “acid test ratio” (also called the “quick ratio”) measure? How is it expressed as a formula?

Answer 1

Measures the relationship between highly liquid assets and current liabilities; expressed as: Acid Test Ratio = (Cash [Cash Equivalents] + Net Accounts Receivable + Marketable Securities)/Current Liabilities
Note: Inventory is excluded from the numerator.

Question 2

What does the “working-capital ratio” (also called the “current ratio”) measure? How is it expressed as a formula?

Answer 2

Measures the quantitative relationship between current assets and current liabilities in terms of the “number of times” current assets can cover current liabilities; expressed as: Working Capital Ratio = Current Assets/Current Liabilities

Question 3

Define “liquidité measures”.

Answer 3

Measurements of the ability of a firm to pay its obligations as they become due; useful in working capital management.

Question 4

What does the “times-interest-earned ratio” measure? How is it expressed as a formula?

Answer 4

Measures the ability of current earnings to cover interest payments for a period; expressed as: (Net Income + Interest Expense + Income Tax Expense)/Interest Expense

Question 5

What does “working capital” measure? How is it expressed as a formula?

Answer 5

Measures the extent to which current assets exceed current liabilities and, thus are uncommitted in the short-term; exposed as: Working Capital = Current Assets - Current Liabilities

Question 6

What does the “defensive-interval ratio” measure? How is it expressed as a formula?

Answer 6

Measures the relationship between highly liquid assets and the average daily use of cash; exposed as: Defensive-Interval Ratio = (Cash [Cash Equivalents] + Net Accounts Receivable + Market Securities)/Average Daily Cash Expenditures.