LDP 3.2 Analyzing the Balance Sheet

Question 1

Current Ratio

Answer 1

CA / CL

Ratio greater than 1.0: The company could pay its current liabilities from its existing current assets, assuming no shrinkage of asset values and similar time frames.

Question 2

Quick Ratio

Answer 2

Quick Assets / Current Liabilities OR
Cash + Cash Equiv + A/R / Current Liab

Ratio greater than 1.0: The company could pay off all its current liabilities from existing cash, the sale of marketable securities, and collection of receivables without any reliance on the sale of inventory.

Ratio less than 1.0: The company must rely on the sale of inventory to cover its current liabilities.

Question 3

Working Capital

Answer 3

CA - CL

Working capital = The amount by which current assets could shrink in value and still be able to satisfy current liabilities

Alternate definition: The amount of current assets not supported by current liabilities, but by long-term sources of capital

Question 4

Debt-to-Worth Ratio

Answer 4

Total Liab / NW

The larger the ratio, the greater the risk to creditors. The actual degree of risk depends on: Quality of assets Structure of liabilities Profitability and cash flow available to service the debts

Question 5

Total Liabilities-to-Tangible Net Worth Ratio

Answer 5

Measures a company’s total liabilities in relation to its net worth without any reliance on intangibles

Question 6

Net Fixed Assets-to-Tangible Net Worth Ratio

Answer 6

• Ratio greater than 1.0: Suggests that a company is relying on liabilities to fund a portion of its fixed assets
• Ratio lower than 1.0: Indicates smaller investments in fixed assets in relation to net worth, and a better cushion for creditors in case of liquidation in bankruptcy

Question 7

Leverage Considering Subordinated Debt as Net Worth

Answer 7

(Total Liab - SubDebt) / (SubDebt + TNW)