module 3 lecture 1 -- liquidity ratios.pdf
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8/17/2019 Module 3 Lecture 1 -- Liquidity Ratios.pdf
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Business Tools for Career Readiness
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Finance for
Non-Financial Professionals
Module 3
with David Standen, D.B.A.
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8/17/2019 Module 3 Lecture 1 -- Liquidity Ratios.pdf
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Liquidity Ratios
• A class of financial metrics
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Liquidity Ratios
• A class of financial metrics
• Used to determine a company's ability topay off its short-term debt obligations
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Liquidity Ratios
• A class of financial metrics
• Used to determine a company's ability topay off its short-term debt obligations
• The higher the value of the ratio, the largerthe margin of safety that the companypossesses to cover short-term debts
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Liquidity Ratios:
Working Capital Ratio
• Indicates whether a company has enough shortterm assets to cover its short term debt.
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Liquidity Ratios:
Working Capital Ratio
• Indicates whether a company has enough shortterm assets to cover its short term debt.
Working Capital Ratio =Current Assets / Current Liabil ities
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Liquidity Ratios:
Working Capital Ratio
• Indicates whether a company has enough shortterm assets to cover its short term debt.
o Anything below 1 indicates negative W/C
o Anything over 2 means the company is not
investing excess assets
o Most believe a ratio between 1.2 and 2.0 is
sufficient
Working Capital Ratio =Current Assets / Current Liabil ities
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Quick Ratio (Acid Test)
• Measures a company’s ability to meet its short-term obligations with its most liquid assets
Liquidity Ratios:
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Quick Ratio (Acid Test)
• Measures a company’s ability to meet its short-term obligations with its most liquid assets.
Liquidity Ratios:
Quick Ratio =(current assets – inventories) / current liabil ities
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Quick Ratio (Acid Test)
• Measures a company’s ability to meet its short-term obligations with its most liquid assets
• Excludes inventories from current assets
• Measures the dollar amount of liquid assets available for
each dollar of current liabilities
• The higher the quick ratio, the better the company's
liquidity position
Liquidity Ratios:
Quick Ratio =(current assets – inventories) / current liabil ities
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