Explore BrainMass

acid test ratio, liquidity and efficiency ratio

tell us how the ratios discussed this week could be used to evaluate a company of your choice. use for additional information.

ratios discussed: current ratio, acid test ratio, liquidity and efficiency ratio, debt ratio, equity ratio, debt-to-equity ratio, profitability ratio, price earnings ratio

Solution Preview

My choice:

KMP (Kinder Morgan Energy Partners

1. current ratio: 0.4
Meaning: since the ratio of this company is less than 1, it means that this company probably has some difficulties to pay their short term debt and liabilities (payable) with the availability short term assets that they have. The short term assets are cash, receivable, and inventory. This ratio is to measure the liquidity of a company.
acid test ratio: is very similar to current ratio test, but exclude inventory and prepaid for their short term assets.
Since acid test does not measure the liquidity of inventory and prepaid

0.4 probably is a low number and not a good sign, but do not forget to compared this ratio to other companies from the same industry which is 0.9, so 0.4 ratio is bad, but not extremely bad.

2. liquidity ratio includes: current ratio, ...