Meaning of ratios 2.0 Flashcards
Current ratio
Ability to pay of current liabilities with its current assets
Current ratio > benchmark
Company has a higher level of liquidity and is better positioned to meet its short-term obligations
More current assets than current liabilities, thus enough working capital to cover its short term debts and maintain its day-to-day operations
High current ratio
Enables a company to take advantage of opportunities to invest in new projects, acquire new assets or expand its business operations
Provide a sens of financial stability to creditors, investors and other stakeholders, as the company is less likely to default on its short term obligations
Current ratio < benchmark
Company may have difficulties meeting its short-term financial obligations and may face liquidity problems
May be cause of concern for creditors, investors and other stakeholders
May have trouble with paying bills, suppliers and other creditors on time
Quick ratio
Ability to pay off current liabilities with its most liquid assets
Pro: only includes most liquid assets, inventory is excluded
Con: not useful when comparing across different industries
Quick ratio is low, while current ratio is high
Company has a significant amount of inventory that is not easily convertible into cash
Hospital has a current ratio above the benchmark and quick ratio below, what does this imply?
The hospital has relatively more total current assets and even more inventory than other hospitals
Low quick ratio > relatively high amount of inventory , raises concern about the managing of inventory
Working capital
Amount of money a company has available to fund its day-to-day operations
Working capital to sales ratio
Ability to efficiently use working capital to generate revenue.
High working capital to sales ratio
Company is able to generate a relatively high level of sales using its available working capital.
Effective management of working capital
