3.3 Ratio Analysis: Short-Term Solvency, or Liquidity, Measures

relationships determined from a firm's financial information and used for comparison purposes

financial ratios

5 categories of financial ratios

financial leverage (long-term solvency), liquidity (short-term solvency), market value, profitability, turnover (asset management)

Short-term solvency ratios as a group are intended to provide information about a firm's ____ and are sometimes called ___

liquidity, liquidity measures

The primary concern of liquidity measures / short-term solvency ratios is the firm's ability to _____ over the ____ without undue stress

pay its bills, short-run

Liquidity measures / short-term solvency ratios focus on _____ and _____

current assets, current liabilities

current ratio equation

current assets / current liabilities

the current ratio is a measure of ______

short-term liquidity

The unit of measure for the current ratio is either ____ or ____

dollars, times

To a creditor -- particularly a short-term creditor such as a supplier -- the ______ a short-term ratio, the better

higher

To the firm, a high current ratio indicates ____, but it also may indicate an _____ use of cash and other short-term assets

liquidity, inefficient

________ is the least liquid current asset

inventory

Relatively large _____ are often a sign of short-term trouble

inventories

quick (acid test) ratio

[current assets - inventory] / current liabilities

cash ratio

cash / current liabilities

net working capital to total assets

net working capital / total assets

interval measure

current assets / average daily operating costs

For new companies, the interval measure indicates how long the company can operate until it needs another round of ______

financing

The average daily operating cost for start-up companies is often called the ______

burn rate