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Articles by Probir Banerjee
Page 8 of 45
What is Net Working Capital Ratio?
Net working capital ratio shows how much of a company’s current liability can be met with the company’s current assets. The net working capital ratio is the measure of a company’s capability in meeting the obligations that must be paid within the foreseeable future. Therefore, it shows the liquidity that is available with the company to meet the liabilities.In other words, the net working capital ratio provides the stakeholders of a business with the idea of the business’s liquidity by showing how effective it is in paying off the current liabilities or the short-term debt using its current assets. The ...
Read MoreWhat are the Types of Activity Ratio?
What is Activity Ratio?The financial ratios that measure the utility of assets by converting assets into sales are known as activity ratios. These ratios are employed to measure the efficiency with which a firm manages and utilizes its assets. These ratios are also called turnover ratios because they imply how many times assets are turned over into sales within a specific period of time.The activity ratio is calculated by dividing the net sales by the working capital.Types of Activity RatiosThe main types of activity ratios are as follows −Inventory Turnover RatioDebtors Turnover RatioAssets Turnover RatiosLet us see each of the ...
Read MoreCash Ratio: Definition and Analysis
What is Cash Ratio?A cash ratio is the ratio that measures a company’s ability to pay off its current liabilities with cash and cash equivalents. The cash ratio is different from quick ratio and current ratio in the sense that the cash ratio considers current assets that are only cash and nothing else. Therefore, the cash ratio is more restrictive in nature than the current and the quick ratio.As the cash ratio looks only at cash, creditors. like to consider this ratio more than anything else. This ratio shows the ability of the company to shed off its current debt, ...
Read MoreHow to Analyze Asset Turnover Ratio?
What is Asset Turnover Ratio?The assets turnover ratio explains the turnover of assets into sales. It is an efficiency ratio that implies a firm’s ability to generate sales from the assets. For this purpose, the net sales figure is compared with the total average assets.The total asset turnover ratio measures net sales as a percentage of assets to show how many sales are created from each rupee of assets.Example − An asset turnover ratio of 0.5 shows that each rupee of assets generates 50 paise of cash.How to Calculate Asset Turnover Ratio?The formula for calculating Asset Turnover is the following ...
Read MoreHow to Calculate Current Ratio?
What is Current Ratio?The correct way to measure the current ratio is to divide current assets by current liabilities.$$\mathrm{Current\: Ratio\:=\:\frac{Current\: Assets}{Current\: Liabilities}}$$Here, current assets include items that are short-term in nature. Both assets and liabilities in the current ratio are meant for items that exist within one year from the date of calculation. As the current ratio is a measure of the short-term solvency of a firm, items that are valid beyond one year are not considered in the calculation.Current AssetsCurrent assets in the calculation of the current ratio include cash and cash equivalents, and items that can be converted ...
Read MoreWhat is Quick Ratio in Finance and How to Calculate It?
What is a Quick Ratio?Cash is an indispensable resource for business firms as cash works as a fuel to run business operations successfully. Lack of cash may push a company to insolvency which is an inability to pay the current expenses. Long-term insolvency may push firms to bankruptcy. Therefore, knowing the position of a company in terms of available cash or liquidity is of utmost importance for the firm. Here’s where the quick ratio comes in handy.A quick ratio is an indicator of a firm’s ability to meet short-term expenses. In simple, it can be termed as the indicator of ...
Read MoreImportance of Leverage Ratio Calculation in Finance
Leverage ratios show the debt position of a company. Debt is an important part of finance for a firm. While debt is necessary to fund projects, excessive debt can be a sign of financial illness of a firm. In fact, both excess and too less availability of debt is detrimental for a firm.As debt ratios show relationships with other items, they can be an eye-opener for management, owners, and investors. An optimum level of debt not only shows the good financial health of a company, but also means that the company would grow in the near and long-term future without ...
Read MoreLiquidity Ratio: Definition, Uses, Types, and Importance
What is Liquidity Ratio?The ratio which measures the capability of a firm to meet its current obligation is known as liquidity ratio. This ratio derived its name from ‘liquidity’ referring to ‘the cash deposits available’.As a result, liquidity ratios are helpful in determining the firm’s ability to meet its short- and long-term liquidity needs. Liquidity ratios form a relationship between cash and other forms of assets to show the firm’s ability to meet its current obligations (current liabilities).Uses of Liquidity RatioLiquidity ratios are used to measure the liquidity position of a company. Usually, high equity is considered to be good ...
Read MoreWhat is Leverage Ratio in Finance?
What is Leverage Ratio?Creditors and lenders invest money in a firm looking for returns at different points in time. Short-term creditors, such as bankers and raw materials suppliers are usually more interested in the short-term liquidity of the firms they invest in. On the other hand, the long-time creditors, such as debenture holders and institutional investors look for the long-term health of a firm.In order to be termed healthy, therefore, a firm should be able to meet its short- as well as long-term obligations. To ascertain the long-term potential of a firm, financial leverage or capital restructure ratios are used. ...
Read MoreWhat is Pro-Forma Ratio Analysis in Financial Accounting?
Pro-Forma Ratio AnalysisPro-forma is a Latin word meaning ‘for the sake of form’. A Pro-forma analysis is a way to project the financials of a firm in a future period. In order to create Pro-forma analysis historical data is used as the base of accounting. Therefore, Pro-forma ratio analysis can be termed as a way of accounting that uses data from the past to forecast the results in the future.Sometimes, Pro-forma analysis is also used to omit the irregularities of accounting. For example, instead of projecting the future position, a Pro-forma report may show the performance of the company if ...
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