Ratio Analysis
Valuations
Charting Technique
- Denotes about the company's ability to pay SHORT TERM DEBT/Obligations
- This ratio is also known as working capital ratio.
- Current ratios denotes the relation between current assets and current liabilities of an entity
- Current liabilities are immediate financial obligations of the company whereas Current assets are the sources to repay current liabilities
- Current ratios indicate the relation between current assets TO current liabilities
- Current liabilities represent the immediate financial obligations of the company
- This ratio is yardstick to measures how far company meet financial obligation as and when they arise
- Higher the Current Ratio, Higher the short term liquidity.
- This ratio denotes about the capacity of the company to meet financial obligation
- Ideal Ratio is 1.5 to 2
- This ratio is also termed as WORKING CAPITAL RATIO
- Too High: Current Assets are too high than liabilities., it denotes too much of funds invested on CURRENT ASSETS
- Too LOW: Current Liabilites are too high than Assets., Unable to maintain the risk
- Quick assets = current assets - stock and prepaid expenses
- Stock is excluded because it is not immediately realizable in cash
- Prepaid expenses are excluded because they cannot be realized in cash
- Stock not able to convert into cash easiliy in case of CURRENT ASSET., hence it is not more appropriate to measure based on current ratio
- Quick ratio is a modified version to current ratio which excludes the cash, useful for measure short term obligations
- Minimum Quick ratio is 1:1
- If the company having enough Net Working Capital it denotes that company having enough Liquidity
- Net Working Capital = Current Assets - Current Liabilities
Liquidity Ratios
Conclusion:
Higher the Ratio is better
Formula:
Current Ratio
AcidTest Ratio
Formula:
Limitations:
What is the relation between NET WORKING CAPITAL to LIQUIDITY
What is CURRENT ASSETS
What is CURRENT LIABILITIES?
