Liquidity ratios

Flashcards by joemiyashiro, updated more than 1 year ago
Created by joemiyashiro about 5 years ago


Financial ratios from Level 1 CFA chapter 6-10

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Question Answer
Current ratio: measure of the ability of a firm to meet its short-term obligations. 2<x<3 optimal current assets/ current liabilities
Quick ratio (acid-test) measure of liquidity where only liquid assets are taken into account Cash+marketable securities+accounts receivables/ Current liabilities
Cash ratio = reveals how much the cash and marketable securities the company has on hand to pay off its current obligations cash+marketable securities/ Current liabilities
Cash flow from operations ratio: indication of a company's ability to pay its ST liabilities with the cash it produces from current operations cash flow from operations/ Current liabilities
Receivables turnover: indicator of the effectiveness of a company's credit policy. Too high = does not offer long enough creidt, too low = difficulties collecting cash Net annual sales/ Average receivables
Average receivables previously reported accounts receivable+current account receivables/ 2
Average number of days receivables outstanding: same as receivable turnover except indicates as a number of days 365 days/ receivables turnover
Average inventory Previously reported inventory+current inventory/2
Inventory turnover: efficiency of inventory utilisation. High = rapid sales, less risk of value decrease. COGS/ Average inventory
Average number of days in stock 365/ inventory turnover
Annual purchases= + - COGS + ending inventory - beginning inventory
Payable turnover Annual purchases/ Average payables
Average number of days payables outstanding 365/ payable turnover
Cash conversion cycle: how many times it takes for the company to convert collection or investment into cash. High = large amount of money invested in sales in process average collection period + average number of days in stock - average age of payables
Defensive interval: worst-case scenario that estimates how many days the company has to maintain its current operations without any additional days 365*(cash+marketable securities+accounts receivable)/ projected expenditures
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