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Liquidity Ratios
Short term liquidity - The primary concern of short-term
creditors when assessing the strength of a firm
Liquidity - Short-term creditors are usually most interested
in assessing this
Liquidity and activity ratios - The two categories of ratios
that should be utilized to asses a firms true liquidity
Liquidity - most of interest to a firms suppliers
The ratios that are used to determine a companys short-term
debt paying ability are current ratio, acid-test ratio,
receivables turnover, and inventory turnover.
Current ratio - is a measure of the liquidity position of a
corporation
Current ratio - ratios would not likely be used by a shortterm creditor in evaluating whether to sell on credit to a
company
Current ratio - ratios would be least helpful in appraising
the liquidity of current assets
Accounts receivable turnover - ratio is most helpful in
appraising the liquidity of current assets
Current ratio - considered to be the most indicative of a
firm's short-term debt paying ability
Current ratio - is rated to be a primary measure of liquidity
and considered of highest significance rating of the liquidity
ratios a bank analyst
A weakness of the current ratio is that it does not take into
account the composition of the current assets.
Acid-test ratio - A measure of a companys immediate shortterm liquidity
The acid-test or quick ratio relates cash, short-term
investments, and net receivables to current liabilities.
Activity Ratios
A general rule to use in assessing the average collection
period is that it should not greatly exceed the credit term
period.
Asset turnover measures how efficiently a company uses its
assets to generate sales.
Total asset turnover measures the ability of a firm to
generate sales through the use of assets
A measure of how efficiently a company uses its assets to
generate sales is the asset turnover ratio.
Long-term creditors are usually most interested in evaluating
solvency.
Trading on the equity (leverage) refers to the use of borrowed
money to increase the return to owners.
The tendency of the rate earned on stockholders' equity to
vary disproportionately from the rate earned on total assets
is sometimes referred to as leverage.