What is the basic liquidity ratio?
Current Ratio = Current Assets / Current Liabilities
Statutory Liquidity Ratio or SLR is a minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold or other securities. It is basically the reserve requirement that banks are expected to keep before offering credit to customers.
A good current ratio is between 1.2 to 2, which means that the business has 2 times more current assets than liabilities to covers its debts. A current ratio below 1 means that the company doesn't have enough liquid assets to cover its short-term liabilities.
- Current Ratio = Current Assets / Current Liabilities.
- Quick Ratio = (Cash + Accounts Receivable) / Current Liabilities.
- Cash Ratio = (Cash + Marketable Securities) / Current Liabilities.
- Net Working Capital = Current Assets – Current Liabilities.
A liquidity ratio is important because it states how much cash a bank to meet the request of its depositors. Therefore, a bank with a liquidity ratio of less than 30% is not a good sign and may be in bad financial health. Above 30% is a good sign.
What are three types of liquidity ratios? The three types of liquidity ratios are the current ratio, quick ratio and cash ratio. These are useful in determining the liquidity of a company.
For instance, a quick ratio of 1.5 indicates that a company has $1.50 of liquid assets available to cover each $1 of its current liabilities. While such numbers-based ratios offer insight into the viability and certain aspects of a business, they may not provide a complete picture of the overall health of the business.
Low current ratio: A ratio lower than 1.0 can result in a business having trouble paying short-term obligations. As such, it may make the business look like a bigger risk for lenders and investors.
The most common Liquidity Ratio is the acid-test ratio. This measures a company's ability to pay off its short-term debts with liquid assets, such as cash equivalents or working capital.
Common liquidity ratios include the quick ratio, current ratio, and days sales outstanding. Liquidity ratios determine a company's ability to cover short-term obligations and cash flows, while solvency ratios are concerned with a longer-term ability to pay ongoing debts.
What is a good profitability ratio?
Net income before taxes is the norm when it comes to measuring a company's profitability. Average net earnings keep increasing. This is often because companies adopt cost-saving strategies and new technology. As a rule of thumb, a good operating profitability ratio is anything greater than 1.5 percent.
The Current Ratio includes all the Current Assets of the business. The Liquid Ratio includes only those Current Assets that the firm can liquidate to cash within the next ninety days. The Current Ratio includes the inventory stock of a firm. The Liquid Ratio excludes the inventory stock of a firm.
During bull markets, holding too much cash can limit returns, while during market busts, cash can provide a cushion. While past performance doesn't guarantee future results, cash has been shown to underperform assets like equities and bonds over the long term.
But it's also important to remember that if your liquidity ratio is too high, it may indicate that you're keeping too much cash on hand and aren't allocating your capital effectively. Instead, you could use that cash to fund growth initiatives or investments, which will be more profitable in the long run.
Liquidity ratios are important to investors and creditors to determine if a company can cover their short-term obligations, and to what degree. A ratio of 1 is better than a ratio of less than 1, but it isn't ideal. Creditors and investors like to see higher liquidity ratios, such as 2 or 3.
For example, if a company has a current ratio of 1.5—meaning its current assets exceed its current liabilities by 50%—it is in a relatively good position to pay off short-term debt obligations. Conversely, if the company's ratio is 0.8 or less, it may not have enough liquidity to pay off its short-term obligations.
The current ratio for Company ABC is 2.5, which means that it has 2.5 times its liabilities in assets and can currently meet its financial obligations Any current ratio over 2 is considered 'good' by most accounts.
2) On Hand Liquidity Ratio: This point-in-time ratio, often called the Primary Liquidity Ratio, assesses a bank's ability to satisfy liabilities with on-balance sheet high-quality liquid assets (HQLA). A minimum of 25% is recommended, with less than 15% warranting a Contingency Funding Plan action.
Coca-Cola Co has a current ratio of 1.13. It generally indicates good short-term financial strength. During the past 13 years, Coca-Cola Co's highest Current Ratio was 1.34. The lowest was 0.76.
Cash is the most liquid of assets, while tangible items are less liquid. The two main types of liquidity are market liquidity and accounting liquidity. Current, quick, and cash ratios are most commonly used to measure liquidity.
What is ideal debt equity ratio?
Generally, a good debt to equity ratio is around 1 to 1.5. However, the ideal debt to equity ratio will vary depending on the industry, as some industries use more debt financing than others.
Determining a Good Working Capital Ratio
Generally, a working capital ratio of less than one is taken as indicative of potential future liquidity problems, while a ratio of 1.5 to two is interpreted as indicating a company is on the solid financial ground in terms of liquidity.
- Finance: 32%
- Software (entertainment): 29.04%
- Transportation: 28.90%
- Tobacco: 20.58%
- Software (System and Application): 19.66%
- Computers and Peripherals: 18.72%
- Information Services: 16.92%
While there are several types of profit margin, the most significant and commonly used is net profit margin, which is based on a company's bottom line after all other expenses, including taxes, have been accounted for.
Ideally companies want an operating margin of 15% or higher. 10% is considered average. A lot of evaluating a company's operating margin depends on what sector the company is in, as well as macro trends to see if margins are going up or down.
