Finance: Asset and Liquidity Ratios Essay

Submitted By d749h749
Words: 355
Pages: 2

Anushiya Shiley Gomes
Finance 300
Witten Assignment The article from Computerized Investing written by CI staff, mentions about Liquidity ratios. According to the article, liquidity ratios are used to determine a company’s ability to meet its short-term debt obligations. Since companies are at a high risk of bankruptcy, it is always good to calculate liquidity ratios to make sure that the companies are on the track. The article mentions about current ratio, quick ratio and cash ratio with cash ratio being the most conservative of the three liquidity ratios. Typically calculating the ratios is the easy part and interpreting the ratios is the hard part. Performing a time-series analysis, a competitive analysis and industry and sector analyses are good first steps for fundamental ratio analysis. The article concludes by saying that it is not always good to rely on a set of ratios and that researching the firm as a whole is important. In class we learned that firms need cash and other liquid assets to pay their bills as they come due. Liquidity ratios measure the relationship between a firm’s liquid assets and its current liabilities. We also learned that the three most commonly used liquidity ratios are the current, the quick and the cash ratio. Inventories are the least liquid firm’s assets. Furthermore, we learned that interpreting the ratios, that is, comparing company ratios with industry averages and determining if it is strength or a