Liquidity Ratios Period 1 Kohei Takata

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Liquidity Ratios By Kohei Takata Jun Yamada Il Young Chun Calvin Kim

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Transcript of Liquidity Ratios Period 1 Kohei Takata

Page 1: Liquidity Ratios  Period 1  Kohei Takata

Liquidity RatiosBy Kohei Takata

Jun YamadaIl Young Chun

Calvin Kim

Page 2: Liquidity Ratios  Period 1  Kohei Takata

Liquidity Ratio

• Assets → cash • Quickly and no loss of value• reveals the level of liquidity• 2 types- Current Ratio/ Acid Test Ratio• Comes from the Balance Sheet

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Key Terms

• Liquid assets (Current Assets)- Cash, Debtors, Stock

• Short- term liabilities• Working Capital• Opportunity Cost• Liquidity crisis

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Current Ratio

• Liquid assets and short-term liabilities• Working capital• Formula

Current Assets____________

Current Liabilities

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Value/ Importance

• Using liquid assets to cover short-term liabilities

• Desirable ratio of 1.5-2.0 to 1• Safety margin• Shows the liquidity position of the firm• Important for trade creditors

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Acid Test Ratio

• Current assets and short- term liabilities (working capital)- stock

• FormulaCurrent Assets- Stock_________________

Current Liabilities

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Value/ Importance

• More meaningful than Current Ratio • At least 1:1• Important for potential investors and short-

term lenders (exposes the level of risk)• Can determine 2 things: – experiencing a liquidity crisis– holding too much current assets

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Limits of Liquidity Ratios

• Ratios – (historical account of a firm’s performance)

• Qualitative factors- ignored• Organizational objectives differ between

businesses (misleading) Ex. Supermarkets and Jewelry shops

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Example: Current Ratio

Company ACurrent Assets: 500,000Stock: 200,000 Cash: 100,000 Debtors: 200,000Current Liabilities: 350,000

500,000_________

350,000Current Ratio- 1.43:1

Meaning: For every $1 of current liabilities, the firm has $1.43 of current assets

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Example: Acid Test RatioCompany A

Current Assets: 500,000Stock: 200,000 Cash: 100,000 Debtors: 200,000Current Liabilities: 350,000

(500,000- 200,000)= 300,000_______________

350,000Acid Test Ratio- 1:1.12

Meaning: For every $1.12 of current liabilities, the firm has $1 of (current assets- stocks) = Possible that the firm is experiencing

a LIQUIDITY CRISIS!!

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Practice: Ho Gam Soft Drinks

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Works cited

• Hoang, Paul. Business and Management. Victoria: IBID, 2007. Print.• BusinessDictionary.com - Online Business Dictionary. Web. 11 Nov.

2009.<http://www.businessdictionary.com/>.• Digital image. BNET. 25 May 2009. Web. 15 Nov. 2009.

<http://i.bnet.com/blogs/credit_cards.jpg>. • Digital image. Naq Computer Systems. Web. 15 Nov. 2009.

<http://www.naqcomputers.com/sales/inventory_large.jpg>. • Digital image. World Press. Web. 15 Nov. 2009.

<http://jshurwitz.files.wordpress.com/2009/10/cash-wad.jpg>.