Enter your search terms Submit search form

Online Financial Courses - Evaluating Financial Performance

Provided by : Matt H. Evans
Adress: 6903 29th St N ; Arlington, VA 22213
Phone number : 1-877-689-4097
Email: matt@exinfm.com

Course 1: Evaluating Financial Performance

Chapter 2: Liquidity Ratios

Liquidity Ratios help us understand if we can meet our obligations over the short-run. Higher liquidity levels indicate that we can easily meet our current obligations. We can use several types of ratios to monitor liquidity.

Current Ratio

Current Ratio is simply current assets divided by current liabilities. Current assets include cash, accounts receivable, marketable securities, inventories, and prepaid items. Current liabilities include accounts payable, notes payable, salaries payable, taxes payable, current maturity's of long-term obligations and other current accruals.

EXAMPLE - Current Assets are \$ 200,000 and Current Liabilities are \$ 80,000. The Current Ratio is \$ 200,000 / \$ 80,000 or 2.5. We have 2.5 times more current assets than current liabilities.

A low current ratio would imply possible insolvency problems. A very high current ratio might imply that management is not investing idle assets productively. Generally, we want to have a current ratio that is proportional to our operating cycle. We will look at the Operating Cycle as part of asset management ratios.
|

Acid Test or Quick Ratio

Since certain current assets (such as inventories) may be difficult to convert into cash, we may want to modify the Current Ratio. Also, if we use the LIFO (Last In First Out) Method for inventory accounting, our current ratio will be understated. Therefore, we will remove certain current assets from our previous calculation. This new ratio is called the Acid Test or Quick Ratio; i.e. assets that are quickly converted into cash will be compared to current liabilities. The Acid Test Ratio measures our ability to meet current obligations based on the most liquid assets. Liquid assets include cash, marketable securities, and accounts receivable. The Acid Test Ratio is calculated by dividing the sum of our liquid assets by current liabilities.

EXAMPLE - Cash is \$ 5,000, Marketable Securities are \$ 15,000, Accounts Receivable are \$ 40,000, and Current Liabilities are \$ 80,000. The Acid Test Ratio is (\$ 5,000 + \$ 15,000 + \$ 40,000) / \$ 80,000 or .75. We have \$ .75 in liquid assets for each \$ 1.00 in current liabilities.
|

Defensive Interval

Defensive Interval is the sum of liquid assets compared to our expected daily cash outflows. The Defensive Interval is calculated as follows:

(Cash + Marketable Securities + Receivables) / Daily Operating Cash Outflow

EXAMPLE - Referring back to our last example, we have total quick assets of \$ 60,000 and we have estimated that our daily operating cash outflow is \$ 1,200. This would give us a 50 day defensive interval (\$ 60,000 / \$ 1,200). We have 50 days of liquid assets to cover our cash outflows.

Ratio of Operating Cash Flow to Current Debt Obligations

The Ratio of Operating Cash Flow to Current Debt Obligations places emphasis on cash flows to meet fixed debt obligations. Current maturities of long-term debts along with notes payable comprise our current debt obligations. We can refer to the Statement of Cash Flows for operating cash flows. Therefore, the Ratio of Operating Cash Flow to Current Debt Obligations is calculated as follows: Operating Cash Flow / (Current Maturity of Long-Term Debt + Notes Payable)

EXAMPLE - We have operating cash flow of \$ 100,000, notes payable of \$ 20,000 and we have \$ 5,000 in current obligations related to our long-term debt. The Operating Cash Flow to Current Debt Obligations Ratio is \$ 100,000 / (\$ 20,000 + \$ 5,000) or 4.0. We have 4 times the cash flow to cover our current debt obligations.
|

 Chapter 1: Return on Equity Chapter 2: Liquidity Ratios Chapter 3: Asset Management Ratios Chapter 4: Profitability Ratios Chapter 5: Leverage Ratios Chapter 6: Market Value Ratios Chapter 7: Comparing Financial Statements Chapter 2 points Current Ratio Acid Test or Quick Ratio Defensive Interval Ratio of Operating Cash F. to Current Debt Oblg.

10 Upcoming learning videos : in all categories

Selected learning videos for today

Explaination about the theory of plate techtonics in geology
Differentes types of rocks in geology
Geology lecture titled Macro evolution in the deep sea by Seilacher
Geological evidence of Darwin theory of evolution that still matters
The meaning of Limestone and shale cycles in the upper ordovician
Geologic carbon sequestration and mitigating climate change by inection of CO2
Geology and mineral resources of oclahoma by Ken Johnson
How to calculate the budget line and prices if you know income
Ecuador geology and volcanology given by Dr throfilos
This video is about Mexico volcanos and Mexico Geological phenomenon
Explanation about the 3 type of rocks and the relationship between them
Learning english vocab for ESL - project management
How to pronunciate words starting with B