Liquidity Ratios Flashcards
(8 cards)
Current ratio
Current assets ➗ current liabilities
Answer *:1
Acid Test ratio
(Current assets - stock) ➗ current liabilities
Answer *:1
Gearing ratio
(Fixed costs capital ➗ long term capital) x100
(Basically = loans ➗ loans+shares+profit) x100
Answer in %
Interest cover
Profit before tax,interest➗ interest
Answer as 5.4
What does current ratio tell us
This measures current assets as a proportion of current liabilities. Measures whether a firm has enough resources to meet its short term obligations. It is an indication of a firms liquidity .
What does acid test ratio tell us
Measures the ability to pay its current liabilities when it comes down to its assets. “Do we have enough in current assets to cover current liabilities” such as overdraft or payments
What does gearing ratio tell us
How much of the money invested in the business do we have to pay back. A fugue over 50% is considered to be high
What does interest cover tell us
Used to determine how easily a company can pay their interest, expenses and outstanding debts. The ratio is calculated by dividing a companies interest for the same period
