Rule of thumb minimum ratio of one short term

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Unformatted text preview: : Minimum ratio of one! Short-term liquidity (2) ● A variation of the current ratio is the Quick Ratio, or (“Acid Test Ratio”) Quick Ratio = [Current assets - inventories] / Current liabilities ● The idea is that inventory is not as liquid as cash. Short-term liquidity (3) Operating Cash Flow to Current Liabilities Ratio = Operating Cash Flow / Current Liabilities ● The advantage is that is based on cash flows information. Long-term solvency ratios ● Measure firm’s ability to meet interest + principal payments on long term debt when they come due. ● The best indicator for assessing long-term solvency is the firm’s capacity to generate earnings in the long term. Long term solvency ratios ● Long-term debt ratio = Long-term debt / Long-term debt + Equity ● Debt-Equity ratio = Long-term debt / Equity ● Liabilities / Assets ratio = Long-term debt / Assets Corporate China Source: FT Other relevant ratios ● For profitability: (operating margin) Operating Profit = Operating Income / Sales EBIT includes income/expenses from operations an...
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