Slides 9 Flashcards
What do liquidity ratios measure?
Liquidity ratios measure the capacity of a company to pay all current liabilities
This includes short-term solvency.
How are short-term liabilities significant for a business?
Short-term liabilities are an important way of funding a firm’s operations
Examples include payables.
True or False: Profitability and liquidity are the same concepts.
False
It is possible to be profitable while having liquidity problems.
What does the cash flow cycle describe?
The cash flow cycle describes how cash flows in and out of a business.
What happens if the cash flow is stopped or seriously reduced?
Serious consequences result.
Name two types of cash payments included in the statement of cash flows.
- Cash payment to suppliers
- Cash payments to employees
What is the formula for the current ratio?
Current assets / Current liabilities
What does a current ratio greater than 1 indicate?
The firm has enough near-cash assets to cover payments due in the immediate future.
What is the quick ratio?
(Current assets - Inventories) / Current liabilities
Why are inventories excluded from the quick ratio?
It may be difficult to turn them quickly into cash.
What is considered a good quick ratio value?
Around 0.8 is a good figure.
What is the working capital to sales ratio formula?
(Current assets - Current liabilities) / Sales x 100
What is the cash conversion cycle (CCC)?
The metric that expresses the number of days it takes for a company to convert inventory into cash flows from sales.
What does the collection period refer to?
How many days on average it takes to get paid by customers.
What is the formula for calculating funding requirement in the cash conversion cycle?
Funding requirement = (Inventory days + Accounts receivable days) - Accounts payable days.
Provide an example of a cash conversion cycle calculation for the automotive sector.
70 days (Inventory) + 40 days (Receivable) - 60 days (Payable) = 50 days
What does ‘Days Sales Outstanding’ measure?
The average number of days it takes to collect payment from customers.
What is the significance of accounts payable days?
It measures how many days on average it takes to pay suppliers.
What is the formula for the interest coverage ratio?
EBIT / Interests
What does the debt-to-equity (D/E) ratio indicate?
The proportion of debt financing relative to equity financing.
What is the formula for return on equity (ROE)?
Net income / Owners’ funds
