Ratios- analysis

Question 1

Ideal acid-test ratio

Answer 1

Ideally, a company would look for its acid-test ratio to be at minimum 1 (or $1.00:$1.00); however, it is not uncommon for successful companies to maintain a lower ratio.

Poor-quality marketable securities or accounts receivables could cause an acid-test ratio to appear better than it truly is.

Question 2

What’s the ideal current ratio?

Answer 2

Many analysts believe that a company should maintain a current ratio of at least 2.

However, some companies do operate successfully with lower ratios.

A company must guard against a current ratio that is too high, especially if caused by:

idle cash
slow-paying customers
and/or slow-moving inventory.

Question 3

The ______ a company’s liquidity ratios, the greater its ability to pay off short-term liabilities with cash and other liquid assets.

Answer 3

higher

Question 4

Ideally, how much working capital should a company have?

Answer 4

a company should maintain just enough working capital to be able to pay its short-term debt.

Question 5

What does the equity ratio tell us?

Answer 5

What percentage of the total assets have been funded through equity

Question 6

What is a good equity ratio?

Answer 6

Equity ratios that are .50 or below are considered leveraged companies; those with ratios of .50 and above are considered conservative

Question 7

Quick Assets

Answer 7

Highly liquid assets that include cash, marketable securities and accounts receivables, and net receivables.

Question 8

What is the best way to measure how well a company is earning money from its assets?

Answer 8

The rate of return on operating assets