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?