## Analysis of the Liquidity of a Company

Liquidity Related Ratios1. Recent RatioThis ratio can be determined as follows,Current Ratio = Current Assets/Current LiabilitiesThis ratio contemplates on identifying the organizations power to match shot term debts. Typically a ratio between 2-3 is considered good. The lower the ration the company means that the business has difficulties in meeting the short term obligations.In the case of lower relation these variables can be further enhanced. Liabilities within 3 months time, 6 months time, 9 months time, 12 months time and whether the current resources may be were able to meet the obligations in a reasonable manner.2. Cash to current Asset RatioThis ratio could be simply determined as follows,Cash to CA = Cash/ Current AssetsThis ratio can highlight the administration of money which the most liquid asset. Bigger ratio can indicate that the business is securing to money without thinking of investment opportunities.3. Fast Asset RatioQuick assets ratio only takes into account the most liquid assets and gives a better measurement of the company’s liquidity.Quick ratio = Liquid current assets (Cash, securities, accounts receivables )/ Current liabilitiesIn this ratio the inventory and other reduced liquid assets are eliminated therefore gives a good indication of the company’s capability to meet the current liabilities.4. Cash RatioCash ratio can be computed as follows,Cash Ratio = Cash and cash equivalents/ Current liabilitiesIn this ratio the consideration receivables are also eliminated and thus give an indication of the supply of immediate assets to hide the existing liabilities.5. Receivable turnover RatioThis ratio can be calculated as follows,Receivable turnover ratio = Sales Revenue / average ReceivablesAverage receivables can be calculated as follows,Average receivables = (Previous account receivables + present account receivables )/2This provides an signal of the company’s credit policy mostly. Bigger relation shows that the company is collects dues from its customers quickly. A top ratio when compared with competition might indicate that the company’s credit policy fairly danger averse where the organization doesn’t give enough credit service and might be dropping on sales opportunity.6. Average Number of days receivable outstandingThis proportion may be computed as follows,Avg No: of days = 365 / Receivable Turn overThus thus giving the number days the receivables are out standing. When the ratio is extended we can arrive at the following ratio,Avg No: of times = (Average Receivables * 365 )/Sales RevenueThis ratio provides an to the credit management plan of the company.To arrive at greater insight you’d assess strong into,a) That are the company’s suppliers? What is the breakdown supplier by supplier based on credit performance?b) Is the company dependent on few suppliers or does the large number have a great number of supplier bases?7. Inventory Start RatioThis ratio could be calculated as follows,Inventory Turnover = Cost of goods sold/average inventoryThis ratio signifies the efficiency of stock management. A high ratio would indicate that the company is controlling its inventory well which enables the company to manage the working capital more effectively.A very high ratio also might indicate that the company doesn’t maintain sufficient amounts of inventory thus leading to loss of prospective customers.A company which is practicing principles like just with time would have a high inventory ratio.a) How successful is the re-order stage? How efficient is warehousing?b) What’s the typical lead time of a supplier?8. Payable Turnover RatioThis can be computed as follows,Payable return = Annual purchases / normal payablesThis ratio can be further broken down into,Annual Purchases = Cost of products sold + Closing catalog – Beginning inventoryAverage payables = (Current payables + Current Payables in the past year )/2This ratio explains how much of credit the organization uses from its suppliers. This percentage is calculated when checking the credit ratings and a low ration may suggest that the company does not get much credit from its suppliers.This may be because,a) The company does not have a good credit record with suppliersb) If the companies have a very large bargaining power they could discuss a low credit period9. Normal Number of Days Payables OutstandingThis ratio could be determines as follows,Average number of days payables fantastic = 365/payable turnoverThis ratio is very just like the ration mentioned in the above section. That ratio tries to state the credit period using days.This ratio is also thought as the average age of payables.10. Cash Conversion CycleThis ratio can be calculated as follows,Cash conversion pattern = average collection period + average number of days in inventory – average age of payablesThis ratio shows the speed of conversion of libraries into money. A high volume proportion could imply that the company has invested on sales in the pipeline sustaining larger number of days in inventory and with high variety period.11. Defensive IntervalThis ratio can be determined as follows,Defensive interval = 365 * (income + marketable securities + accounts receivable )/ operational expensesThis ratio is used to identify the worst case scenario to identify how long the company can survive incurring its regular operational expenses without generating sales.Operational expenses are funded with the current assets and this gives the number of times the company can survive without generating sales.A higher ratio may mean that the company is maintaining a lot of current assets. To determine on the use of current assets proportions like current ratio, quick asset ratio should be considered.

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