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Liquidity Ratios

Definition of 'Liquidity Ratios'

A class of financial metrics that is used to determine a company's ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts.

explains 'Liquidity Ratios'

Common liquidity ratios include the current ratio, the quick ratio and the operating cash flow ratio. Different analysts consider different assets to be relevant in calculating liquidity. Some analysts will calculate only the sum of cash and equivalents divided by current liabilities because they feel that they are the most liquid assets, and would be the most likely to be used to cover short-term debts in an emergency.

A company's ability to turn short-term assets into cash to cover debts is of the utmost importance when creditors are seeking payment. Bankruptcy analysts and mortgage originators frequently use the liquidity ratios to determine whether a company will be able to continue as a going concern.

Testing a company's liquidity is a necessary step in analyzing a company. Read Liquidity Measurement Ratios to further improve your understanding of these ratios.

Liquidity ratios

    — Acid-Test Ratio
    — Cash Ratio
    — Current Ratio
    — Net Working Capital
    — Quick Ratio
    — Working Capital
    — Working Capital Ratio

Accounting Ratio

Definition of 'Accounting Ratio'

A way of expressing the relationship between one accounting result and another, which is intended to provide a useful comparison. Accounting ratios assist in measuring the efficiency and profitability of a company based on its financial reports. Accounting ratios form the basis of fundamental analysis.

Also called financial ratio.

explains 'Accounting Ratio'

An accounting ratio compares two aspects of a financial statement, such as the relationship (or ratio) of current assets to current liabilities. The ratios can be used to evaluate the financial condition of a company, including the company's strengths and weaknesses. An example of an accounting ratio is the price-to-earnings (P/E) ratio of a stock. This measures the price paid per share in relation to the profit earned by the company per share in a given year

Financial Analysis Tools

Defining Financial Analysis Tools

Financial analysis tools are one of the most efficient ways that can be used for ensuring good profit from your investments. These financial analysis tools are highly helpful in evaluating the market and investing in a way so as to maximize the profit from the investments made. These financial analysis tools are useful for deciphering both internal and external information related to a specific business organization.

Applications of Financial Analysis Tools

Mainly, the financial analysis tools can be used for SWOT analysis. The term SWOT is short for:

S – Strength
W – Weaknesses
O – Opportunities
T – Threats

The economic conditions in the present day market are analyzed by management professionals with assistance from SWOT analysis performed by the various financial analysis tools. Each section of the evaluation process contains specific information which is helpful in gauging the general performance of a company. Moreover, financial analysis tools are really important for any investor for the company’s performance shows direct impact on the price of a company’s stock.

Types of Financial Analysis Tools

There are different types of financial analysis tools available in the financial field. These tools are designed especially for carrying out specific functions. Among these different types of financial analysis tools, the Balanced Scorecard is one tool which can be of good assistance to gauge the financial position of a company (can be easily performed using ReadyRatios software). This financial analysis tool is helpful in subjective as well as objective measurement of special processes. Moreover, this financial tool is also helpful in evaluation of a company’s overall return, the operating income, and the capital financing processes.

Another important financial analysis tool is benchmarking which is used for assessing the intrinsic strengths and weaknesses of a business organization. Besides, this also sways the stock price of the company. Also, there are some professional agencies which use this type of financial analysis tools to generate advices for their clients.
In addition to the aforementioned financial analysis tools, other important financial analysis tools include ratio analysis, trend analysis, comparative financial statement analysis or horizontal analysis, and common size statement analysis or vertical analysis.