RATIOS

RECAP So far we have looked at the following: The importance of Financial Analysis How to calculate comparative values into percentages How to calculate the Percentage Change between two values

RATIO ANALYSIS Ratios are used to provide relevant information for decision making. They show the comparison of one piece of information on a financial statement in comparison to another piece. Most ratios are expressed as a fraction or in colon form EX - 2:1

LIQUIDITY Liquidity refers to a company’s ability to easily convert it’s assets to cash or produce cash. A company’s liquidity ratio indicates it’s ability to pay it’s current liabilities without having to borrow funds This is important because it lets creditors know that a company will be able to pay back debts

LIQUIDITY RATIOS Some of the liquidity ratios we will be working with: Working Capital Current Ratio Quick Ratio

WORKING CAPITAL This ratio is an indicator of a company’s ability to pay short term debts. It is calculated by finding the difference between Current Assets and Current liabilities Working Cap = Curr. Assets – Curr. Liabilities

WAIT JUST A MINUTE What are CURRENT Assets and CURRENT liabilities???? Simply just assets that can be converted into cash, sold or consumed within one year. Current Liabilities are those which can be paid within one year.

MOVING ON… Another method of measuring a company’s ability to pay it’s current debts is to calculate the Current Ratio. This is done by dividing the Current Assets by the current liabilities. Expressed in colon form (1:1) EX – Current Ratio = Current Assets Current Liabilities

QUICK RATIO Like the current ratio but it ONLY takes into account those current assets that are MOST easily converted to cash. So Cash, Marketable securities, Accounts Receivable.

HOMEWORK Text book Page 649 apply your knowledge