liquidity ratios analysis

Question 1

current ratio formula

Answer 1

current assets / current liabilities

Question 2

quick ratio formula

Answer 2

current assets - inventory / current liabilities

Question 3

trade receivables ratio formula

Answer 3

trade receivables x 365 / Revenue

Question 4

trade payables ratio

Answer 4

trade payables x365 / CoS

Question 5

inventory turnover ratio

Answer 5

inventories x 365 / CoS

Question 6

current ratio definition

Answer 6

an indicator of the company’s ability to pay off its ST liabilities with its ST assets

Question 7

current ratio interpretation

Answer 7

• a current ratio below 1 could indicate that a company might be struggling to meet its ST obligations
• A ratio above 1 indicates a company can pay its current debts as they come due

Question 8

trade receivables ratio definition

Answer 8

measures the number of times that receivables are converted to cash during a certain time period

Question 9

trade receivables ratio interpretation

Answer 9

• a high ratio indicates that corporate collection practices are efficient with quality customers who pay their debts quickly

Question 10

trade payables ratio definition

Answer 10

used to measure the number of times the business is paying off its creditors or suppliers in an accounting period.

Question 11

trade payables ratio interpretation

Answer 11

• a higher ratio indicates that the company is paying its suppliers promptly, which means it has good credit management practices and maintains healthy relationships with its suppliers
• a lower ratio may indicate that the company is having difficulty paying its bills

Question 12

inventory turnover ratio definition

Answer 12

measures how many times a company’s inventory is sold and replaced over a specific period, typically a year, indicating the efficiency of inventory management and the liquidity of inventory.

Question 13

inventory turnover interpretation

Answer 13

the higher the ratio, the better.
- a low inventory turnover ratio might be a sign of weak sales

Question 14

quick ratio definition

Answer 14

measures a company’s ST liquidity against its ST obligations

Question 15

quick ratio interpretation

Answer 15

• a quick ratio of 1:1 is considered ideal
• a ratio greater than 1 indicates that a company has enough liquid assets to cover its current liabilities
• below 1 means that the company may struggle to meet its ST obligations without relying in additional financing or the sale of less liquid assets