Microsoft Office Tutorials and References
In Depth Information
Liquidity ratios
Liquidity ratios measure a company's ability to pay its bills in the short term. Poor liquidity ratios may indicate
that the company has a high cost of financing or is on the verge of bankruptcy.
Net Working Capital is computed by subtracting current liabilities from current assets:
=Total_Current_Assets–Total_Current_Liabilities
Current assets are turned into cash within one accounting period (usually one year). Current liabilities are debts
that will be paid within one period. A positive number here indicates that the company has enough assets to pay
for its short-term liabilities.
The Current Ratio is a similar measure that divides current assets by current liabilities:
=Total_Current_Assets/Total_Current_Liabilities
When this ratio is greater than 1:1, it's the same as when Net Working Capital is positive.
The final liquidity ratio is the Quick Ratio. Although the Current Ratio includes assets, such as inventory and
accounts receivable that will be converted into cash in a short time, the Quick Ratio includes only cash and as-
sets that can be converted into cash immediately.
=(Cash+Marketable_Securities)/Total_Current_Liabilities
A Quick Ratio greater than 1:1 indicates that the company can pay all its short-term liabilities right now.
The following custom number format can be used to format the result of the Current
Ratio and Quick Ratio:
0.00”:1”_)
Asset use ratios
Asset use ratios measure how efficiently a company is using its assets: that is, how quickly the company is turn-
ing its assets back into cash. The Accounts Receivable Turnover ratio divides sales by average accounts receiv-
able:
=Revenue/((Account_Receivable+LastYear_Accounts_Receivable)/2)
Accounts Receivable Turnover is then used to compute the Average Collection Period:
=365/Accounts_receivable_turnover
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