RATIOS Flashcards
current ratio
company’s ability to meet its short-term obligations
rule of thumb : healthy business have a minimum current ratio of 2
If an entity has a current ratio significantly higher than that of its peers
the entity holds more cash or inventory than a business needs.
it is a signal that it is locking up potentially productive capital
If an entity has a current ratio significantly lower than one of its peers
the entity may question its ability to satisfy its current obligations in a timely manner
debt to equity ratio
measures financial leverage or the degree of the entity indebtenedness relative to its equity funding
the larger its debt to equity ratio…
the greater is the implied strain on the entity to make regular payment to debt holders, and the higher is the risk of bankruptcy
If a company has a total debt to equity ratio that is significantly higher than of its peers
they may be concerned about its ability to make the requirement payments to its debt holders and the company’s long-term solvency may be questioned
If a company has a total debt to equity ratio that is significantly lower than that of its peers
they may question whether the company is being aggressive enough in pursuing profitable growth opportunities by raising debt when necessary to finance those opportunities
gross margin percentage
represents the mark up on the costif the products sold by a company