Liquidity
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Liquidity ratios measure a company's ability to pay off short-term debt obligations by dividing cash and liquid assets by short-term borrowings and current liabilities. A ratio of over 1 means a company has sufficient liquid assets to meet short-term debt obligations, indicating good financial health. Higher liquidity ratios provide a greater margin of safety to cover current liabilities and mean the company is less likely to face financial difficulties. Debt ratios, on the other hand, assess a company's ability to handle long-term financial obligations by analyzing the proportion of total assets that were financed through debt. Generally, lower debt ratios are preferable, as they mean more assets were paid for without taking on debt.
Liquidity
- 1. Liquidity ratios: What is it? Liquidity ratios are the ratios that measure the ability of a company to meet its short term debt obligations. These ratios measure the ability of a company to pay off its short-term liabilities when they fall due. The liquidity ratios are a result of dividing cash and other liquid assets by the short term borrowings and current liabilities. They show the number of times the short term debt obligations are covered by the cash and liquid assets. If the value is greater than 1, it means the short term obligations are fully covered. Generally, the higher the liquidity ratios are, the higher the margin of safety that the company posses to meet its current liabilities. Liquidity ratios greater than 1 indicate that the company is in good financial health and it is less likely fall into financial difficulties. Debt ratios/Solvency ratios are used by investors to get a picture of how well a company can deal with its long-term financial obligations and develop future assets. As you might expect, a company weighed down with debt is probably a less favorable investment than one with a minimal amount of debt on its books. The total debt to total assets ratio is used to determine how many of a company's assets were paid for with debt. When using this ratio to make an analysis of a company, it can be really helpful to look at the company's as well as making industry comparisons. It's not unrealistic for a younger company to have a debt to total assets ratio closer to "1" (more assets were financed by debt), as it hasn't yet had a chance to eliminate its debt. As a general rule, a number close to zero is generally better, because it means that more assets were paid for without debt. Remember, lenders have first claim on a company's assets if they're forced to liquidate. But again, it will depend on the industry, as those with highly capital intensive operations will have a higher relative debt level.