Defining Key Liquidity and Coverage Ratios PPT

This PPT slide, part of the 48-slide Financial Ratio Analysis PowerPoint presentation, presents a focused overview of liquidity and coverage ratios, essential tools for assessing a company's financial health. It distinguishes between 2 categories of ratios: liquidity ratios and coverage ratios. Liquidity ratios are derived from balance sheet items, while coverage ratios utilize income statement figures. This distinction is crucial for understanding how these ratios provide insights into a firm's operational efficiency and financial stability.

Under the liquidity section, the slide outlines 2 key ratios: the current ratio and the quick ratio, also known as the acid test. The current ratio is defined as current assets divided by current liabilities, indicating the firm's ability to cover short-term obligations with its short-term assets. The quick ratio refines this perspective by excluding inventory from current assets, focusing instead on cash, marketable securities, and receivables against current liabilities. This offers a more stringent view of liquidity.

The coverage section includes the interest coverage ratio and fixed charge coverage ratio. The interest coverage ratio measures how easily a company can pay interest on outstanding debt, calculated as earnings before interest and taxes divided by interest expense. The fixed charge coverage ratio extends this analysis by considering all essential payments, including lease obligations, thus providing a broader view of financial commitments.

Overall, this slide serves as a foundational reference for understanding critical financial ratios that inform decision-making. It emphasizes the importance of liquidity and coverage in evaluating a firm's ability to meet its financial obligations, which is vital for stakeholders considering investment or partnership opportunities.

This slide is part of the Financial Ratio Analysis PowerPoint presentation.

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