FINE 2000 Lecture Notes - Lecture 2: Reserve Requirement, Asset Turnover, Current Liability
Document Summary
When dealing with payables: account payables are informal, unwritten agreements, note payables are formal, written agreements. Interest is deducted after ebit because it is a financing activity, and needs to be separated. Liquidity: current ratio -current assets / current liabilities current assets and the ability to pay of current liabilities, quick ratio - current assets minus inventory / current liabilities. Shows even stricter liquidity ratios: cash ratio - cash + cash equivalents / current liabilities. Long term solvency: total debt ratio = total liabilities / total assets, what percentage of the firm is financed by creditor debts. For debtors, the higher the better; higher ebit and lower interest owed: cash coverage - (ebit + depreciation) / interest, ability to pay out to debtors using cash. If you are a non-profit company, you may want a lower ratio, as this will bring in grants.
