The liquidity of a business firm is measured by its ability to satisfy itslong-
term obligations as they become due. What are the ratios used forthis purpose?
Yes it is true that the liquidity of a business firm is measured by its ability to pay its long term obligations as they become due. Here the long term obligation means payments of principal amount on the due date and payments of interests on the regular basis. For measuring the long term solvency of any business we calculate the following ratios.
Debt Equity Ratio: Debt equity ratio indicates the relationship between the
external equities or outsiders funds and the internal equities or shareholders
funds. It is also known as external internal equity ratio. It is determined to ascertain soundness of the long term financial policies of the company. Following formula is used to calculate debt to equity ratio.
Debt Equity Ratio = External Equities.
Shareholders funds
Proprietory Ratio/Total Assets to Debt Ratio: Total assets to Debt Ratio or
Proprietory Ratio are a variant of the debt equity ratio. It is also known as equity
ratio or net worth to total assets ratio. This ratio relates the shareholder’s funds
to total assets. Proprietory / Equity ratio indicates the long-term or future
solvency position of the business. Formula of
Proprietory or Equity Ratio = Shareholders funds
Total Assets
Proprietory/Equity Ratio Interest Coverage Ratio: This ratio deals only with
servicing of return on loan as interest. This ratio depicts the relationship between
amount of profit utilise for paying interest and amount of interest payable. A high
Interest Coverage Ratio implies that the company can easily meet all its interest
obligations out of its profit.
Interest Coverage Ratio = Net Profit before interest and tax
Interest on Long Term loans
How will you disclose the following items in the Balance Sheet of a company;
(i) Loose tools
(ii) Uncalled liability on partly paid-up shares
(iii) Debentures redemption reserve
(iv) Mastheads and publishing titles (v) 10% debentures
(vi) Proposed dividend
(vii) Share forfeited account
(viii) Capital redemtion reserve
(ix) Mining rights
(x) Work-in-progress
The current ratio provides a better measure of overall liquidity only when a
firm’s inventory cannot easily be converted into cash. If inventory is liquid, the
quick ratio is a preferred measure of overall liquidity. Explain.
Explain the usefulness of trend percentages in interpretation of financial performance of a company.
What relationships will be established to study?
(a) Inventory Turnover (b) Debtor Turnover
(c) Payables Turnover (d) Working Capital Turnover
What do you understand by analysis and interpretation of financial statements? Discuss its importance.
State the importance of financial statements to
(i) shareholders
(ii) creditors
(iii) government
(iv) investors
What are liquidity ratios? Discuss the importance of current and liquid ratio.
What is the importance of comparative statements? Illustrate youranswer with particular reference to comparative income statement.
What do you mean by Ratio Analysis?
Describe the different techniques of financial analysis and explain the limitations of financial analysis.
Prepare the format of balance sheet and explain the various elements of balance sheet.
Explain how common size statements are prepared giving an example.
How would you study the Solvency position of the firm?
What do you mean by Common Size Statements?
What do you mean by Ratio Analysis?
What are limitations of financial statement analysis?
Explain the nature of the financial statements.
What are liquidity ratios? Discuss the importance of current and liquid ratio.
What do you understand by analysis and interpretation of financial statements? Discuss its importance.
Prepare the format of statement of profit and loss and explain its items.