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Liquidity
The degree to which an asset or security can
be bought or sold in the market without
affecting the asset's price. Liquidity is
characterized by a high level of trading activity.
Assets that can be easily bought or sold are
known as liquid assets.
The ability to convert an asset to cash quickly.
Also known as "marketability.
There is no specific liquidity formula; however,
liquidity is often calculated by using liquidity
ratios.
http://www.investopedia.com/video/play/liq
uidity/
Current Ratio
Current Ratio = Current Assets
Current Liabilities
What does it show?
The current ratio should be higher than 1:1; however, 1.5:1
2:1 is considered as ideal. This represents 1.50 or 2 of
current assets to every 1 of current liabilities.
A value of below 1.5:1 suggests a liquidity/solvency
problem.
A current ratio in excess of 2:1 may indicate poor
management of resources with capital tied up in stocks,
debtors or lying idle in the bank.
Individual Activity
Calculate the following ratios:
ROCE (Return on Capital Employed)
Current Ratio
Acid Test Ratio
Extension
Comment on what each result shows and how might they act
on the result.
1,250
Cost of Sales
900
Gross Profit
350
Operating Expenses
105
Operating Profit
245
Interest Payable
50
195
35
160
Dividends
120
40
Review
ROCE =
245 x 100
1,160
21 .1%
Review
Gross Profit Margin = 350 x 100
1,250
= 28%
This means that on every $ worth of
goods sold, the company made on average
28 cents gross profit.
Review
Net Profit Margin = 195x 100
1,250
= 15.6%
The higher this result, the more
successful the managers are in making
profit from sales.
Review
Current Ratio = 140
130
= 1.1:1
This result is low. It means the business
could only just pay off its short term debts
from current assets. A safer ratio would be
between 1.5 - 2
Review
Acid Test Ratio = 140 80
130
= 0.46:1
This is low. A result of 1 would mean the
company could just pay off its debts. This
result means that the company cannot
afford to do this.