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Liquidity ratio:
Liquidity Ratio also measures a firm¶s ability to meet its short-term financial obligations on time.
This is calculated by taking the ratio of the
c
c
Ôigher the current assets of a company and lower the current liabilities, greater
is the working capital. A larger chunk of working capital can be used to fund the long term
liabilities of the company and therefore, the larger the working capital, the better it is for the
company. Working Capital Days: Working capital days is defined as the ratio of the working
capital to the current liabilities of the company in any year.
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The debt-to-equity ratio offers one of the best pictures of a company's
leverage. The higher the figure, the higher is the leverage the company enjoys. Mathematically, it
is defined as the ratio of the total debt to the total equity of the company under consideration at
any point of time.
Ê Ê
The interest coverage ratio is a measurement of the number of times a
company could make its interest payments with its earnings before interest and taxes. Lower the
ratio, higher is the company¶s debt burden. This is measured as the ratio between the profit
before interest and taxes to the interest amount paid that year.
ÊÊÊ
The ratio here is self explanatory and measures the share ofÊ
the debt to the total capital employed (funds) in the company. Capital employed for this purpose,
we define as, the amount of long term liabilities of the company, which comprises of loans and
owner¶s fund (which includes capital and reserves.)
ÊÊÊ
The ratio between the reserves maintained by the company to the
capital employed by it measures the level of self created wealth that is used to fund the
company¶s operations