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RATIO ANALYSIS PART 2 & WORKING CAPITAL MANAGEMENT
What does the Current Ratio measure in ratio analysis?
The Current Ratio measures a firm's ability to meet its short-term obligations using current assets. It is calculated as Current Assets divided by Current Liabilities, with a standard benchmark of 2:1 for healthy liquidity.
What is the Capital Gearing Ratio and what does a high ratio indicate?
Fixed interest capital to equity; high ratio means high financial risk.
What is the Quick Ratio (Acid Test Ratio) and why is it preferred over the Current Ratio?
The Quick Ratio is calculated as (Current Assets minus Inventory) divided by Current Liabilities. It is preferred because it excludes inventory, which may not be quickly convertible to cash, giving a more conservative liquidity picture.
What is the Absolute Liquid Ratio (Super Quick Ratio) and what does it measure?
Cash plus bank balances to current liabilities; measures immediate liquidity.
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