ratios Flashcards
What are accounting ratios?
Accounting ratios are metrics used to assess the financial health and performance of a company.
Who commonly uses accounting ratios?
- Investors
- Creditors
- Management
- Analysts
- Regulatory Authorities
- Potential Buyers
What is solvency?
Solvency is the ability of a company to meet its long-term debts and other financial obligations.
What does liquidity represent?
Liquidity represents a company’s ability to meet its short-term obligations.
What is the purpose of ratio analysis?
To understand liquidity and solvency.
Which ratios are used to measure liquidity?
- Net Working Capital
- Current Ratio
- Quick Ratio (Acid-test Ratio)
How is Net Working Capital calculated?
Net Working Capital = Current Assets - Current Liabilities
What does the Current Ratio measure?
The Current Ratio measures current assets against current liabilities.
What is considered a healthy Current Ratio?
Anything around 1 is considered healthy; the higher, the better.
What is the Quick Ratio also known as?
The Quick Ratio is also known as the acid-test ratio.
What does the Quick Ratio measure?
The Quick Ratio measures a company’s ability to pay its current liabilities without relying on the sale of inventory.
What indicates a high degree of liquidity between two companies?
A higher Current Ratio and Quick Ratio indicate a high degree of liquidity.
What do solvency ratios provide?
Solvency ratios offer a longer-term outlook on a company.
What is the Debt-to-Equity Ratio?
The Debt-to-Equity Ratio indicates how a company is funded, in this case, by debt.
What does a lower Debt-to-Equity Ratio indicate?
A lower ratio indicates that a company is less leveraged and more able to pay off its debts.
How is the Debt-to-Equity Ratio calculated?
Debt-to-Equity Ratio = Debt / Equity
What does the Debt-to-Assets Ratio measure?
The Debt-to-Assets Ratio measures a company’s leverage.
What does a lower Debt-to-Assets Ratio indicate?
The lower, the better; it indicates less reliance on debt for funding.
