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2_Liquidity Ratios

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Think about your blood test

Identify, monitor and recognize signs and symptoms

E.g cholesterol ratio, blood-plasma ratio

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Financial ratios

Uses values from 3 statements to give insights about a company

Indicates liquidity, profitability and valuation

To invest or not to invest

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Current ratio

Current ratio

Company’s ability to pay short-term (<12 months) dues

=	Current assets
	Current liabilities

=	$ 250,000,000	=	2
	$ 125,000,000

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Think about a fruit stall owner

Current ratio

You have $1,000 of apples and $1,000 cash

You owe your farmer $500

Current ratio is 4

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Quick ratio

Quick ratio

Company’s ability to pay short-term (<12 months) dues with liquid assets only

=	Current assets - Inventories
	Current liabilities

=	$ 250,000,000 - $50,000,000	=	1.6
	$ 125,000,000

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Think about a fruit stall owner

Quick ratio

You have $1,000 of apples, $1,000 cash and $1,000 in receivables

You owe your farmer $1,000

Quick ratio is 2

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Cash ratio

Cash ratio

Company’s ability to pay short-term (<12 months) dues with cash & cash equivalents only

=	Cash & cash equivalents
	Current liabilities

=	$ 60,000,000	=	4
	$ 15,000,000

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Think about a fruit stall owner

Cash ratio

You have $1,000 of apples and $1,000 cash

You owe your farmer $500

Cash ratio is 2

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Current > Quick > Cash

Current Assets

Cash & cash equivalents

Account receivables

Other current assets

Inventories

Cash ratio

Quick ratio

Current ratio

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Gearing ratio

Gearing ratio

How leveraged the company is (how much borrowed)

=	Total debt
	Total equity

=	$ 250,000,000	x 100 % =	25%
	$ 1,000,000,000

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Think about a fruit stall owner

Gearing ratio

You have $10,000 equity (assets – liabilities)

You owe your farmer $500 and $1,500 for stall rental

Gearing ratio is 20%