Skip to main content

LIQUIDITY RATIOS : MBA NOTES

LIQUIDITY RATIOS

WORKING CAPITAL:
Working capital compares current assets to current liabilities and serves as the liquid reserve available to satisfy contingencies and uncertainties, A high working capital balance is mandated if the entity is unable to borrow on short notice. The ratio indicates the short-term solvency of a business and in determining if a firm can pay its current liabilities when due.

Formula:     Current assets - Current liabilities

ACID TEST OR QUICK RATIO:
A measurement of the liquidity position of the business. The quick ratio compares the cash plus cash equivalents and accounts receivable to the current liabilities. the primary difference between the current ratio and the quick ratio is the quick ratio does not include inventory and prepaid expenses in the calculation. Consequently, a business's quick ratio will be lower than its current ratio. It is a stringent test of liquidity.

Formula:      Cash+Marketable securities+Account Receivable
                                                    Current Liabilities

CURRENT RATIO:
Provides an indication of the liquidity of the business by comparing the amount of current assets to current liabilities. A business's current assets generally consist of cash, marketable securities, accounts receivable and inventories  Current liabilities include accounts payable current maturities of long-term debt, accrued income taxes and other accrued expenses that are due within one year, In general businesses prefer to have at least one dollar of current assets for every dollar of current liabilities. However, the normal current ratio fluctuates from industry to industry. A current ratio significantly higher than the industry average could indicate the existence of redundant assets  Conversely a current ratio significantly lowers than the industry average could indicate a lack of liquidity.

Formula:           Current Assets
                         Current Liabilities

CASH RATIO:
Indicates a conservative view of liquidity such as when a company has pledged its receivables and its inventory, or the analyst suspect's severe liquidity problems with inventory and receivables.

Formula:           Cash Equivalents + Marketable Securities
                                              Current Liabilities

SYNOPSIS OF FINANCIAL ANALYSIS
FINANCIAL STATEMENTS / FINANCIAL REPORTS
USERS OF FINANCIAL STATEMENTS
TYPES OF FINANCIAL ANALYSIS
TOOLS OF FINANCIAL ANALYSIS (METHODS)
RATIO ANALYSIS
CLASSIFICATION OF RATIOS
LIQUIDITY RATIOS
PROFITABILITY RATIOS
LEVERAGE RATIO
EFFICIENCY RATIO


MBA NOTES
Labels:

Comments

Post a Comment

Popular posts from this blog

MANAGEMENT

MANAGEMENT Definition: A set of activities planning, organizing, staffing, leading and controlling to achieve the organizational goals. or Management is the process of designing and maintaining an environment for efficiently accomplishing selected aims. or Set of activities (planning, organization, leading,controlling) directed at an organization resources (finance, human, physical and information) to achieve the organizational goals in an effecient and effective manner is called management. Efficient: The efficient mean do work be fore the due date. Effective: To complete the work in time. eg. if we say someone to complete task in 10 days and he complete the task in 10 days no more or no less that person called effective person. Manager: A person who perform all organization activities are called manager. Management Resoureces: There are four basic management resources. Finance Human Physical Information Finance: Finance mean the assets like as C...
1 comment
Read more

MBA NOTES:TYPES OF FINANCIAL ANALYSIS

TYPES OF FINANCIAL ANALYSIS Following are the various types of financial analysis. A. On the basis of material used. 1. External Analysis Analysis of financial statements may be carried out on the basis of published information. i.e.., information made available in the annual report of the enterprise. such analysis are usually carried out by those who do not have access to the detailed accounting records of the Co. i.e., Banks, Creditors etc. 2. Internal Analysis Analysis may also be based on detailed information available within the Co. which is not available to the outsiders. such analysis is called internal analysis. this type of analysis id of a detailed one and is carried out on behalf of the management for the purpose of providing necessary information for decision making, such analysis emphasizes on the performance appraisal and assessing the profitability of different activities. B. According to objectives ...
1 comment
Read more

MBA NOTES:types of strategies

Types of strategies Growth Strategies THERE ARE THREE MAIN TYPES OF GROWTH STRATEGIES forward integration backward integration horizontal integration forward integration|forward strategies|vertical strategies GAINING OWNERSHIP OR CONTROL OVER DISTRIBUTOR, WHOLE SELLER backward integration TO SEEK OVER OWNERSHIP OR CONTROL OVER FIRM SUPPLIER horizontal integration TO SEEK OWNERSHIP OR CONTROL OVER THE FIRM COMPETITOR intensive strategies THERE ARE THREE MAIN TYPES OF INTENSIVE STRATEGIES market penetration market development product development market penetration SEEK TO INCREASE MARKET SHARE OF PRESENT PRODUCT OR SERVICES IN THE PRESENT MARKET THROUGH GREATER MARKETING EFFORTS market development INTRODUCING PRESENT PRODUCT OR SERVICES IN NEW GEOGRAPHICAL AREA product development INCREASE THE SALES BY IMPROVING OR MODIFYING PRESENT PRODUCT OR SERVICES diversification strategies THERE ARE TWO MAIN TYPES OF DIVERSIFICATION STRATEGIES rela...
1 comment
Read more