7/24/2019 Module 3 Lecture 1 -- Liquidity Ratios
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Business Tools for Career Readiness
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Finance for
Non-Financial Professionals
Module 3
with David Standen, D.B.A.
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Liquidity Ratios
A class of financial metrics
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Liquidity Ratios
A class of financial metrics
Used to determine a company's ability topay off its short-term debt obligations
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Liquidity Ratios
A class of financial metrics
Used to determine a company's ability topay off its short-term debt obligations
The higher the value of the ratio, the largerthe margin of safety that the companypossesses to cover short-term debts
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Liquidity Ratios:
Working Capital Ratio
Indicates whether a company has enough shortterm assets to cover its short term debt.
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Liquidity Ratios:
Working Capital Ratio
Indicates whether a company has enough shortterm assets to cover its short term debt.
Working Capital Ratio =Current Assets / Current Liabil ities
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Liquidity Ratios:
Working Capital Ratio
Indicates whether a company has enough shortterm assets to cover its short term debt.
o Anything below 1 indicates negative W/C
o Anything over 2 means the company is not
investing excess assets
o Most believe a ratio between 1.2 and 2.0 is
sufficient
Working Capital Ratio =Current Assets / Current Liabil ities
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Quick Ratio (Acid Test)
Measures a companys ability to meet its short-term obligations with its most liquid assets
Liquidity Ratios:
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Quick Ratio (Acid Test)
Measures a companys ability to meet its short-term obligations with its most liquid assets.
Liquidity Ratios:
Quick Ratio =(current assets inventories) / current liabil ities
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Quick Ratio (Acid Test)
Measures a companys ability to meet its short-term obligations with its most liquid assets
Excludes inventories from current assets
Measures the dollar amount of liquid assets available for
each dollar of current liabilities
The higher the quick ratio, the better the company's
liquidity position
Liquidity Ratios:
Quick Ratio =(current assets inventories) / current liabil ities
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