Financial Ratios and Liquidity Lecture Review

Flashcards covering key concepts from the lecture on financial ratios, including ideal ratios, liquidity, and the benefits and drawbacks of using financial analysis.

What is generally considered an ideal current ratio?

Around 1.5:1.

What does a current ratio of 'SC: 1' indicate?

For every amount of current liabilities, there is an equal amount of current assets.

What might a too-high asset ratio signal negatively for a business?

It may indicate too many current assets, like inventories that aren't selling, which could be used for other purposes.

What risk does a business with low liquidity face?

It is in danger if short-term creditors, such as banks for an overdraft, demand payment quickly.

Name two ways a business can seek to improve its liquidity.

Selling assets no longer being used (turning them into cash) and moving cash balances from current accounts to high-interest bearing accounts.

What are two other strategies a business can use to improve liquidity, besides selling assets or moving cash?

Switching to long-term sources of finance and monitoring receivables to avoid bad debts.

What are the main benefits of using financial ratios for a business?

They help interpret data, make comparisons (over time and with other businesses), and aid in decision-making (e.g., setting objectives).

What are some drawbacks of using financial ratios?

They don't account for external factors (PESTLE), may not apply to all businesses (e.g., small chip shops), require consideration of reasons behind the ratios, and provide only quantitative information.