finance investment ratio analysis liquidity ratio presentation

1. Finance &
Investment
1
PRESENTED BY
Dr. Ramadan Babers
https://www.linkedin.com/in/ramadan-babers-phd-78976345/
Part_05

2. 2
1 • Liquidity Ratios: Introduction
2 • Working Capital
3 • Current (working capital) Ratio
4 • Acid Test (quick) Ratio
5 • Cash Ratio
Liquidity Ratios

3. 3Liquidity Ratios
Liquidity ratios are concerned with the
ability of the business to meet its short-
term financial obligations. The following
ratios are widely used:
The ability to pay current liabilities from
current assets
Working Capital
Current (working
capital) Ratio
Acid Test (quick)
Ratio
Cash Ratio

4. 4Working Capital
The excess of current assets over current liabilities
While this is not a ratio, it does give an indication of a
company’s liquidity
Working Capital = Current assets – current liabilities

5. 5Current (working capital) Ratio
The current ratio compares the ‘liquid’ assets (that is, cash and those
assets held that will soon be turned into cash) with the current liabilities.
The ratio is calculated as follows:
Current (working capital) Ratio =
Current assets
Current liabilities
Current (working capital) Ratio =
$65000
$42000
= 1.55 ∶ 1
The higher the current ratio, the more liquid the business is considered to be. As liquidity is vital
to the survival of a business, a higher current ratio might be thought to be preferable to a
lower one. If a business has a very high ratio, however, it may indicate that excessive funds are
tied up in cash, or other liquid assets, rather than being employed more Productively

6. 6Acid Test (quick) Ratio
For many businesses, inventories cannot be converted into cash quickly
Acid Test Ratio =
Current assets - inventories
Current liabilities
Acid Test Ratio =
Cash equivalents+ marketable securities + net receivable
Current liabilities
The minimum level for this ratio is often stated as 1.0 times (or 1:1)
For many highly successful businesses, however, it is not unusual for the acid test ratio to be
below 1.0 without causing liquidity problems

7. 7Cash Ratio
Cash Ratio =
Cash equivalents + marketable securities assets
Current liabilities
• The cash ratio is a measurement of a
company's liquidity, specifically the ratio of
a company's total cash and cash
equivalents to its current liabilities
• The metric calculates a company's ability
to repay its short-term debt with cash or
near-cash resources, such as easily
marketable securities

8. 8Liquidity Ratio
Working Capital
Current (working capital)
Ratio
Current assets –
Acid Test (quick)
Ratio
Cash Ratio
Current assets
Current liabilities
Current assets
- inventories
Cash equivalents
+ marketable securities
+ net receivable
Cash equivalents
+ marketable securities

9. 9Liquidity Ratio
Working Capital
Current Ratio
Current assets – current liabilities
Acid Test Ratio
Cash Ratio
Current assets
Current liabilities
Current assets (excluding inventories)
Current liabilities
cash
Current liabilities

10. End
Q & A
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