1 of 12

2_Liquidity Ratios

2 of 12

Think about your blood test

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  • Identify, monitor and recognize signs and symptoms

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  • E.g cholesterol ratio, blood-plasma ratio

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3 of 12

Financial ratios

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  • Uses values from 3 statements to give insights about a company

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  • Indicates liquidity, profitability and valuation

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To invest or not to invest

4 of 12

Current ratio

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  • Current ratio

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​

​

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

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​

​

=

Current assets

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Current liabilities

=

$ 250,000,000

=

2

$ 125,000,000

5 of 12

Think about a fruit stall owner

Current ratio

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

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  • You owe your farmer $500

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  • Current ratio is 4

6 of 12

Quick ratio

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  • Quick ratio

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​

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

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​

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=

Current assets - Inventories

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Current liabilities

=

$ 250,000,000 - $50,000,000

=

1.6

$ 125,000,000

7 of 12

Think about a fruit stall owner

Quick ratio

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

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  • You owe your farmer $1,000

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  • Quick ratio is 2

8 of 12

Cash ratio

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  • Cash ratio

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​

​

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

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​

​

=

Cash & cash equivalents

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Current liabilities

=

$ 60,000,000

=

4

$ 15,000,000

9 of 12

Think about a fruit stall owner

Cash ratio

​

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

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  • You owe your farmer $500

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  • Cash ratio is 2

10 of 12

Current > Quick > Cash

Current Assets

Cash & cash equivalents

Account receivables

Other current assets

Inventories

Cash ratio

Quick ratio

Current ratio

11 of 12

Gearing ratio

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  • Gearing ratio

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  • How leveraged the company is (how much borrowed)

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​

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=

Total debt

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Total equity

=

$ 250,000,000

x 100 % =

25%

$ 1,000,000,000

12 of 12

Think about a fruit stall owner

Gearing ratio

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

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

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  • Gearing ratio is 20%