Quick ratio

Abstract: A well designed and implemented working capital management has a significant contribution for firms’ profitability as well as to maintain liquidity powers. The purpose of this study is to assess working capital adequacy and its impact on profitability; to investigate the relationship between profitability and liquidity of firms. Natural logarithm of total current liabilities and Relative Solvency Ratio (RSR) are taken as dependent variables to measure the required size of current liabilities and firm’s solvency level respectively. Independent variables are sales, return on assets, current ratio, and cash conversion cycles. These are included in the panel data regression to assess for 250 firms for the period of 10 years. The regression result indicated that sales and cash conversion cycle have highly positive significant effect to determine required current liabilities (short term debt) whereas return on assets and current ratio have highly negative significant effect to determine required current liabilities. The result of negative association between profitability and liquidity is statistically insignificant. With the help of student t-test, the study also revealed that firms with adequate working capital achieved better performance than those firms which have less working capital in related to their operational sizes. Therefore, the null hypothesis that there is no difference between firms which have adequate working capital and less working capital in relation to their operational size on profitability is rejected as the p value is less than 0.05.

Abstract: Financial analysis involves the selection, evaluation, and interpretation of financial data and other pertinent information to assist in evaluating the operating performance and financial condition of a company. The operating performance of a company is a measure of how well a company has used its resources—its assets, both tangible and intangible—to produce a return on its investment. The financial condition of a company is a measure of its ability to satisfy its obligations, such as the payment of interest on its debt in a timely manner. The analyst has many tools available in the analysis of financial information. These tools include financial ratio analysis and quantitative analysis. The analyst must understand how to use these tools, along with economics and accounting information, in the most effective manner. Keywords: financial ratios; coverage ratio; return ratio; turnover ratio; component percentage; return-on-investment ratios; return on assets; basic earning power ratio; operating earnings; return on equity; equity multiplier; Liquidity; liquid assets; working capital; net working capital; operating cycle; average day's cost of goods sold; number of days of inventory; average credit sales per day; days sales outstanding; number of days of credit; average day's purchases on credit; days payables outstanding; cash conversion cycle; net operating cycle; current ratio; quick ratio; acid-test ratio; net working capital–to-sales ratio; profitability ratios; profit margin ratios; gross profit margin; operating profit margin; net profit margin; activity ratios; inventory turnover ratio; accounts receivable turnover ratio; net credit sales; total asset turnover ratio; fixed-asset turnover; financial risk; financial leverage ratios; debt-to-assets ratio; interest coverage ratio; times interest-covered ratio; fixed-charge coverage ratio; cash-flow interest coverage ratio; common-size analysis; vertical common-size analysis; horizontal common-size analysis; common-size balance sheet; common-size income statement

Abstract: Financial analysis involves the selection, evaluation, and interpretation of financial data and other pertinent information to assist in evaluating the operating performance and financial condition of a company. The operating performance of a company is a measure of how well a company has used its resources—its assets, both tangible and intangible—to produce a return on its investment. The financial condition of a company is a measure of its ability to satisfy its obligations, such as the payment of interest on its debt in a timely manner. The analyst has many tools available in the analysis of financial information. These tools include financial ratio analysis and quantitative analysis. The analyst must understand how to use these tools, along with economics and accounting information, in the most effective manner. Keywords: financial ratio; coverage ratio; return ratio; turnover ratio; component percentage; return-on-investment ratios; basic earning power ratio; operating earnings; return on assets; return on equity; equity multiplier; liquidity; liquidity assets; working capital; net working capital; operating cycle; average day's cost of goods sold; number of days of inventory; average credit sales per day; days sales outstanding; number of days of credit; average day's purchase on credit; days payables outstanding; cash conversion cycle; net operating cycle; current ratio; acid-test ratio; quick ratio; net working capital-to-sales ratio; profitability ratio; profit margin ratios; gross profit margin; operating profit margin; net profit margin; activity ratios; inventory turnover ratio; accounts receivable turnover ratio; net credit sales; total asset turnover ratio; fixed-asset turnover; financial risk; financial leverage ratios; debt-to-assets; interest coverage ratio; times interest-covered ratio; fixed-charge coverage ratio; cash-flow interest coverage ratio; common-size analysis; vertical common-size analysis; horizontal common-size analysis; common-size balance sheet; common-size income ratio

Abstract: EXECUTIVE SUMMARY * The current ratio and its variations are most commonly used to assess a company's liquidity, but these measures do not incorporate the element of time. Adding the cash conversion cycle (CCC) to those traditional measures leads to a more thorough analysis of a company's liquidity position. * Static measures of liquidity are fairly simple to compute, but they can be quite difficult to interpret. * The CCC is calculated with a three-part formula that expresses the time that a company takes to sell inventory, collect receivables, and pay its accounts. * Comparing the current ratios and the CCCs for Best Buy and Circuit City during the 10 years before Circuit City's 2008 bankruptcy filing illustrates the additional information that adding the CCC method can provide. ********** [ILLUSTRATION OMITTED] A good assessment of a company's liquidity is important because a decline in liquidity leads to a greater risk of bankruptcy. FASB describes liquidity as reflecting an assets of a liabilitys nearness to cash" (Statement of Financial Accounting Concepts No. 5, Recognition and Measurement in Financial Statements of Business Enterprises). Creditors often incorporate into loan covenants minimum measures of liquidity that borrowers must maintain. Investors and analysts are interested in a company's ability to generate cash and to have enough cash available to meet everyday demands, and vendors are interested in whether a company will regularly have cash available to pay for purchased goods. Liquidity is also important to external auditors for responsibilities such as assessing issues of going concern. Given the growing emphasis on risk assessment within companies, public accounting practitioners performing such engagements, as well as internal auditors, could also benefit from reliable measures of liquidity in helping management to better understand vulnerabilities. In assessing company liquidity, the most commonly used measure is the current ratio and its variations, such as the quick/acid-test ratio. These measures, however, fail to incorporate a measure of "nearness" to cash described by FASB beyond the fact that "current" generally indicates that the assets will be converted to cash or consumed during the normal operating cycle of the business, and the liabilities will be liquidated using current assets, or by the creation of other current liabilities. Nevertheless, in accounting and auditing textbooks, the current and quick ratios continue to be the focus of liquidity analysis. Noticeably absent from almost all accounting and auditing textbooks is an approach to liquidity analysis that incorporates the element of time--the cash conversion cycle (CCC), which was introduced in 1980 by Verlyn Richards and Eugene Laughlin in their article "A Cash Conversion Cycle Approach to Liquidity Analysis," Financial Management, Vol. 9, No. 1 (Spring 1980). Consideration of the CCC along with the traditional measures of liquidity will lead to a more thorough analysis of a company's liquidity position. This article describes the CCC approach and demonstrates how static measures of liquidity can be misleading if used exclusively, while the CCC can provide a useful complement in assessing company liquidity and hence (as prior studies have shown) profitability and stock returns. This is demonstrated by focusing on a comparison of Best Buy and Circuit City during the 10 years leading up to Circuit City's 2008 bankruptcy filing. STATIC MEASURES OF LIQUIDITY Static measures of liquidity, such as the current and quick ratios, have certain advantages over the CCC. Namely, the static measures are quick and easy to compute, and they focus on the impact on liquidity of all current liabilities, whereas the CCC only focuses on the impact of accounts payable. The static measures, however, are deficient in many ways, and the CCC addresses many of those deficiencies, making it a useful complement in liquidity analysis. …