2-Working Capital Management Ratio Analysis

2-Working Capital Management Ratio Analysis - Ratios...

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Ratios Liquidity Ratios: Liquidity ratios provide information about a firm's ability to meet its short-term financial obligations. They are of particular interest to those extending short-term credit to the firm. Two frequently-used liquidity ratios are the current ratio (or working capital ratio ) and the quick ratio . Short-term creditors prefer a high current ratio since it reduces their risk. Shareholders may prefer a lower current ratio so that more of the firm's assets are working to grow the business. Typical values for the current ratio vary by firm and industry. For example, firms in cyclical industries may maintain a higher current ratio in order to remain solvent during downturns. Current Ratio = Current Assets / Current Liabilities One drawback of the current ratio is that inventory may include many items that are difficult to liquidate quickly and that have uncertain liquidation values. Quick Ratio = Current Assets – Inventory / Current Liabilities The quick ratio is an alternative measure of liquidity that does not include inventory in the current assets. The current assets used in the quick ratio are cash, accounts receivable, and notes receivable. These assets essentially are current assets less inventory. The quick
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2-Working Capital Management Ratio Analysis - Ratios...

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