3. Liquidity Ratio
A liquidity ratio is a type of financial ratio used to determine a
company’s ability to pay its short-term debt obligations. The
metric helps determine if a company can use its current, or
liquid, assets to cover its current liabilities.
Three liquidity ratios are commonly used – the current ratio,
quick ratio, and cash ratio. In each of the liquidity ratios, the
current liabilities amount is placed in the denominator of the
equation, and the liquid assets amount is placed in the
numerator.
4. 1. Current Ratio
Formula: current ratio = current assets / current liabilities
The current ratio is the simplest liquidity ratio to calculate and
interpret. Anyone can easily find the current assets' and current
liabilities line items on a company’s balance sheet. Divide
current assets by current liabilities, and you will arrive at the
current ratio.
5.
6. 2: Quick ratio
Quick ratio =current assets – inventories/current laibilites
However, the quick ratio only considers certain current assets. It
considers more liquid assets such as cash, accounts receivables,
and marketable securities. It leaves out current assets such as
inventory and prepaid expenses because the two are less liquid.
So, the quick ratio is more of a true test of a company’s ability to
cover its short-term obligations.
7.
8. 3: Cash ratio
Cash ratio = (cash + marketable securities) / current liabilities
The cash ratio takes the test of liquidity even further. This ratio
only considers a company’s most liquid assets – cash and
marketable securities. They are the assets that are most readily
available to a company to pay short-term obligations.
In terms of how strict the tests of liquidity are, you can view the
current ratio, quick ratio, and cash ratio as easy, medium, and
hard.
9.
10. Leverage Ratio
A leverage ratio is any one of several financial measurements
that look at how much capital comes in the form of debt (loans)
or assesses the ability of a company to meet its financial
obligations. The leverage ratio category is important because
companies rely on a mixture of equity and debt to finance their
operations, and knowing the amount of debt held by a company
is useful in evaluating whether it can pay off its debts as they
come due.
11. 1:The debt-to-equity (D/E) ratio
Debt-to-equity ratio, which measures a company’s ability to
service its debt obligations with respect to shareholder equity is
calculated as total debt/total equity.
Formula: total debt / shareholders equity
12.
13. 2:Debt-to-assets ratio:
Which measures a company’s ability to service its debt
obligations with respect to its tangible and intangible assets and
is calculated as total debt/total assets.
Formula : total debt / total assets
14.
15. 3:Debt-to-Capital Ratio :
Which measures a company’s ability to service its debt
obligations with respect to capital, including shareholder equity
and interest-bearing debt.
Formula: long term debt / total capitalization
16.
17. A coverage ratio, broadly, is a metric intended to measure a
company's ability to service its debt and meet its financial
obligations, such as interest payments or dividends . the higher
the coverage ratio, the easier it should be to make interest
payments on its debt or pay dividends. The trend of coverage
ratios over time is also studied by analysts and investors to
ascertain the change in a company's financial position.
18. Interest coverage ratio :
He interest coverage ratio is a debt and profitability ratio used to
determine how easily a company can pay interest on its
outstanding debt.
Formula : earnings before interest taxes (ebit) / interest
expense
