Team A Ratio Analysis Memo Liquidity Ratios section
Team A Ratio Analysis Memo Liquidity Ratios section
Current Ratio
A company must consider current ratios when determining the Liquidity ratios; this is because a current ratio is used to determine what the company liquidity and their ability to pay the companies short term debts back. The current ratios are figured out by talking the company’s current assists and dividing them by their current liabilities. In order to become a ratio it must be taken by x: 1, x is the current assets for every dollar of the company’s liabilities.
Example A:
Current Ratio= Wal-Mart’s Current Ratio= = 1.60:1
Wal-Mart’s Current Ratio is in the billions of dollars range of course, but what this tells us is that Wal-Mart gains $1.60 of current assets for every $1.00 of current liabilities. Showing that Wal-Mart has the assets to cover the cost of their current liabilities, which is good for companies as large as Wal-Mart.
Quick Ratio
The quick ratio also known as the Acid Ratio is calculated by taking the company’s current assets minus the company’s inventories divided by current liabilities. Showing how the company can pay back its short term obligations that need to paid off quickly, giving the company a better rounded number by excluding the company’s inventory for its current assets. Why some may ask, this is because company’s find it difficult to turn their inventory into cash thus becoming less of an asset.
Example B:
Quick Ratio= Wal-Mart’s Current Ratio= =1.26:1
This shows a difference in numbers but that is because the inventory has been eliminated because of the difficulty of turning it into a cash assets.
Receivables’ Turnover Ratio
Many types of these ratios are important; however this ratio is important to the measure of the liquidity. It helps determine how fast Wal-Mart’s receivables can be made into cash. Showing the number of times Wal-Mart collect their receivables during any period of time, the higher the numbers the better, because that allows Wal-Mart to
Current Ratio
A company must consider current ratios when determining the Liquidity ratios; this is because a current ratio is used to determine what the company liquidity and their ability to pay the companies short term debts back. The current ratios are figured out by talking the company’s current assists and dividing them by their current liabilities. In order to become a ratio it must be taken by x: 1, x is the current assets for every dollar of the company’s liabilities.
Example A:
Current Ratio= Wal-Mart’s Current Ratio= = 1.60:1
Wal-Mart’s Current Ratio is in the billions of dollars range of course, but what this tells us is that Wal-Mart gains $1.60 of current assets for every $1.00 of current liabilities. Showing that Wal-Mart has the assets to cover the cost of their current liabilities, which is good for companies as large as Wal-Mart.
Quick Ratio
The quick ratio also known as the Acid Ratio is calculated by taking the company’s current assets minus the company’s inventories divided by current liabilities. Showing how the company can pay back its short term obligations that need to paid off quickly, giving the company a better rounded number by excluding the company’s inventory for its current assets. Why some may ask, this is because company’s find it difficult to turn their inventory into cash thus becoming less of an asset.
Example B:
Quick Ratio= Wal-Mart’s Current Ratio= =1.26:1
This shows a difference in numbers but that is because the inventory has been eliminated because of the difficulty of turning it into a cash assets.
Receivables’ Turnover Ratio
Many types of these ratios are important; however this ratio is important to the measure of the liquidity. It helps determine how fast Wal-Mart’s receivables can be made into cash. Showing the number of times Wal-Mart collect their receivables during any period of time, the higher the numbers the better, because that allows Wal-Mart to
References: United states securities and exchange. (2009). Retrieved from http://www.sec.gov/Archives/edgar/data/104169/000010416913000011/wmt10-k.htm United states securities and exchange. (2009). Retrieved from http://www.sec.gov/cgi-bin/viewer?action=view&cik=104169&accession_number=0000104169-13-000011&xbrl_type=v# Investopida. (2009). Retrieved from http://www.investopedia.com/terms/q/quickratio.asp Investopida. (2009). Retrieved from http://www.investopedia.com/terms/i/inventoryturnover.asp