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# Current, Quick, Cash Ratios and Short Term Liquidity

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- Describe the circumstances under which the current, quick and cash ratios, respectively, are more appropriate measures of short term liquidity than other ratios.
- Describe the effect of a cash versus a stock dividend on stockholder's equity.

Examples are helpful as are references so that I can use for research for my paper.

#### Solution Preview

Describe the circumstances under which the current, quick and cash ratios, respectively, are more appropriate measures of short-term liquidity than other ratios.

Current ratio measures a company's ability to pay short-term obligations. The formula is current ratio=current assets/current liabilities.
This ratio measure the ability of a company to pay back its' short term liabilities with its' short term assets. Short-term liabilities would be debt and payables; short-term assets include cash, inventory, and receivables. The higher the ratio, the more capable the company is of paying off its' obligations. If the ratio is under 1, it is probable that a company would be unable to cover its' obligations if they came due at that point. This is not a good sign. The current ratio gives a sense of the efficiency at which the company is operating as well as its' ability to turn product into cash. If the company is not turning its' receivable into cash, not cycling through its' inventory, or has larger debt than they might run into liquidity problems and be unable to alleviate their debt. It is important to consider this ratio in perspective of other companies within the same industry. It is also useful to combine this knowledge with potential in the market to gain a broader view of the company. Shareholders like a low current ratio ...

#### Solution Summary

This solution describes the circumstances under which the current, quick and cash ratios, respectively, are more appropriate measures of short term liquidity than other ratios. It also describes the effect of a cash versus a stock dividend on stockholder's equity. It gives examples and APA references.

\$2.19

## Short Term Solvency Ratios

HANDOUT: Useful Financial Ratios (see attachment)

SHORT-TERM SOLVENCY RATIOS (Liquidity Ratios)
Current ratio = Current assets ÷ Current liabilities
Quick ratio = (Current assets - Inventory) ÷ Current liabilities
ACTIVITY RATIOS
Total asset turnover = Total operating revenues ÷ Average total assets
Receivables turnover = Total operating revenues ÷ Average receivables
Average collection period = Days in period ÷ Receivables turnover
Inventory turnover = Cost of goods sold ÷ Average inventory
Days in inventory = Days in period ÷ Inventory turnover
FINANCIAL LEVERAGE RATIOS
Debt ratio = Total debt ÷ Total assets
Debt-equity ratio = Total debt ÷ Total equity
Equity multiplier = Total assets ÷ Total equity
Interest coverage = Earnings before interest and taxes ÷ Interest
PROFITABILITY RATIOS
Net profit margin = Net income ÷ Total operating revenue
Operating profit margin = Earnings before interest and taxes ÷ Total operating revenues
Net return on assets = Net Income ÷ Average Total Assets
Gross return on assets = Earnings before interest and taxes ÷ Average total assets
Net[Gross] Return on assets (ROA) = Net[Gross] Profit margin × Asset Turnover
Return on equity (ROE) = Net income ÷ Average stockholders' equity
Payout ratio = Cash dividends ÷ Net Income
Retention ratio = Retained earnings ÷ Net Income = 1 - Payout ratio
MARKET VALUE RATIOS
Price-to-earnings (P/E) ratio = Market price per share ÷ Earnings per share
Dividend yield = Dividend per share ÷ Market price per share
Market-to-book (M/V) ratio = Market price per share ÷ Book value per share
Tobin's Q ratio = (Market value of debt + equity) ÷ Replacement value of total assets

DUPONT RATIO

Net profit ratio x Total asset turnover x 1+ Debt ratio

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