Understanding Liquidity Ratios and Their Importance in Financial Analysis
Explore the concept of liquidity ratios and how they help in analyzing a firm's liquidity, profitability, and solvency. Learn about important ratios such as the Acid-Test Ratio and inventory turnover to make informed financial decisions.
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Presentation Transcript
Ratio Analysis Liquidity Ratios Compute the Acid-Test Ratio for 2011. Illustration 14-13 SO 5 Identify and compute ratios used in analyzing a firm s liquidity, profitability, and solvency.
Ratio Analysis Liquidity Ratios The acid-test ratio measures immediate liquidity. SO 5 Identify and compute ratios used in analyzing a firm s liquidity, profitability, and solvency.
Ratio Analysis Liquidity Ratios It measures the number of times, on average, the company collects receivables during the period. SO 5 Identify and compute ratios used in analyzing a firm s liquidity, profitability, and solvency.
Ratio Analysis Liquidity Ratios A variant of the receivables turnover ratio is to convert it to an average collection period in terms of days. 365 days / 10.2 times = every 35.78 days This means that receivables are collected on average every 36 days. SO 5 Identify and compute ratios used in analyzing a firm s liquidity, profitability, and solvency.
Ratio Analysis Liquidity Ratios Inventory turnover measures the number of times, on average, the inventory is sold during the period. SO 5 Identify and compute ratios used in analyzing a firm s liquidity, profitability, and solvency.
Ratio Analysis Liquidity Ratios A variant of inventory turnover is the days in inventory. 365 days / 2.3 times = every 159 days Inventory turnover ratios vary considerably among industries. SO 5 Identify and compute ratios used in analyzing a firm s liquidity, profitability, and solvency.
Ratio Analysis Liquidity Ratios Illustration 14-27 Summary of liquidity ratios SO 5 Identify and compute ratios used in analyzing a firm s liquidity, profitability, and solvency.
