Investigation of the Liquidity of a Business

gerryeller96 — Sat, 21 Jul 2012 23:20:25 +0000

Liquidity Connected Ratios1. Present RatioThis ratio may be computed as follows,Current Ratio = Current Assets/Current LiabilitiesThis ratio contemplates on pinpointing the businesses ability to meet photo term liabilities. Generally a rate between 2 to 3 is recognized as good. The lower the ration it means that the company has problems in achieving the temporary obligations.In the case of lower proportion these aspects may be further expanded. Liabilities within 3 months time, 6 months time, 9 months time, 12 months time and whether the existing assets can be managed to meet the liabilities in a regular manner.2. Cash to present Asset RatioThis ratio can be simply calculated as follows,Cash to CA = Cash/ Current AssetsThis ratio will highlight the management of income which the most liquid asset. Higher rate may indicate that the organization is holding on to cash without considering expense opportunities.3. Rapid Asset RatioQuick assets ratio only considers the most liquid assets and gives a better description of the company’s liquidity.Quick ratio = Liquid current assets (Cash, investments, records receivables )/ Current liabilitiesIn this ratio the supply and other low liquid assets are removed thus gives a good sign of the company’s power to match the current liabilities.4. Cash RatioCash ratio may be calculated as follows,Cash Ratio = Cash and cash equivalents/ Current liabilitiesIn this ratio the account receivables are also removed and therefore provide an indication of the availability of quick resources to cover up the current liabilities.5. Receivable turnover RatioThis ratio can be calculated as follows,Receivable turnover ratio = Sales Revenue / regular ReceivablesAverage receivables can be calculated as follows,Average receivables = (Previous account receivables + recent account receivables )/2This has an sign of the company’s credit policy largely. Greater ratio suggests that the organization is collects fees from its clients rapidly. A high proportion in comparison to competition might suggest that the company’s credit policy somewhat risk averse where the business does not provide enough credit facility and might be losing on income opportunity.6. Average Number of days receivable outstandingThis relation could be calculated as follows,Avg No: of days = 365 / Receivable Turn overThus this gives the range days the receivables are out position. If the ratio is expanded we could arrive at the following ratio,Avg No: of days = (Average Receivables * 365 )/Sales RevenueThis ratio gives an to the credit administration policy of the company.To arrive at greater insight you would analyze deep into,a) Who are the company’s vendors? What’s the description supplier by supplier based on credit performance?b) Is the organization dependent on several manufacturers or does it have a large number of supplier bases?7. As follows,Inventory Turnover = Cost of goods sold/average inventoryThis ratio indicates the efficiency of inventory management inventory Turn over RatioThis ratio can be computed. A high ratio would indicate that the company is managing its inventory well which permits the company to control the working capital more effectively.A very high ratio also may indicate that the company does not maintain adequate levels of inventory thus leading to reduction of potential customers.A company which is training methods like just over time would have a high inventory ratio.a) How successful is the re-order level? How effective is warehousing?b) What is the average lead time of a supplier?8. Due Turnover RatioThis can be calculated as follows,Payable turnover = Annual acquisitions / common payablesThis ratio can be further separated into,Annual Purchases = Cost of products sold + Closing stock – Beginning inventoryAverage payables = (Current payables + Current Payables in the previous year )/2This ratio explains just how much of credit the company uses from its suppliers. This rate is determined when examining the credit ratings and a low ration could show that the company doesn’t get much credit from its suppliers.This might be because,a) The company doesn’t have a good credit history with suppliersb) If the suppliers have a very high bargaining power they might negotiate a low credit period9. Normal Number of Days Payables OutstandingThis ratio can be calculates as follows,Average number of times payables outstanding = 365/payable turnoverThis ratio is quite much like the ration discussed in the above section. This ratio tries to express the credit period using days.This ratio can also be defined as the average age of payables.10. Cash Conversion CycleThis as follows,Cash conversion cycle = average collection period ratio could be calculated + average number of days in stock – average age of payablesThis ratio illustrates the pace of conversion of selections into cash. A high total ratio can mean that the organization has spent on income in the pipe keeping higher number of days in stock and with high collection period.11. Defensive IntervalThis ratio can be calculated as follows,Defensive period = 365 * (money + marketable securities + accounts receivable )/ operational expensesThis ratio is used to identify the worst case scenario to identify just how long the company can survive experiencing its standard operational expenses without generating sales.Operational expenses are financed with the current assets and thus giving the number of times the company can survive without generating sales.A higher ratio will imply that the company is keeping a whole lot of current assets. To end on the employment of current assets ratios like current ratio, quick asset ratio should be thought about.

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Investigation of the Liquidity of a Business