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Ratio Analysis

Liquidity Video

Current Ratio

  • Looks at the ratio between Current Assets and Current Liabilities
  • Current Ratio = Current Assets : Current Liabilities
  • Ideal level? – 2 : 1
  • A ratio of 5 : 1 would imply the firm has £5 of assets to cover every £1 in liabilities
  • A ratio of 0.75 : 1 would suggest the firm has only 75p in assets available to cover every £1 it owes
  • Too high – Might suggest that too much of its assets are tied up in unproductive activities – too much stock, for example?
  • Too low - risk of not being able to pay your way

Learning Intentions

  • What does liquidity/liquidation mean?
  • What is the main Liquidity Ratio?
  • Who is interested in Liquidity Ratios?
  • How do I know if the answer is good/bad - Benchmarking
  • Explain what might the problem be?

Profitability Ratios - what do we know?

  • Profitability?
  • Which Ratios?
  • High or Low?
  • Can you evaluate?
  • What might be wrong?
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