Current Cash Debt Coverage Ratio

Current Cash Debt Coverage Ratio: Definition The current cash debt coverage ratio is a liquidity ratio that measures the efficiency of an entity’s cash management. It ratio shows a company’s relation to the operating cash flow received during an accounting period with the current liabilities it needs to clear. In other words, the current cash debt coverage ratio measures the entity’s ability to pa…

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Defensive Interval Ratio (DIR)

Defensive Interval Ratio (DIR): Definition The defensive interval ratio (DIR) is used to measure a company’s cash-based liquidity. It indicates the number of days that a company can operate without using non-current assets or other cash financial resources. The defensive interval is also known as the defensive interval period (DIP) or basic defense interval (BDI). The defensive interval ratio is s…

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Limitations of Accounting Ratios

Accounting ratios are powerful tools in analysis and planning. However, they are not without their limitations. Two principal limitations of accounting ratios are given below: 1. An accounting ratio is only an indicator of a problem; it is not a solution to a problem For example, a poor gross profit ratio shows that there is a problem; it does not provide an answer as to what can be done to rectif…

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Uses and Advantages of Accounting Ratios

Accounting ratios are a powerful tool when evaluating a business unit’s performance. The most important uses and advantages of accounting ratios are discussed in this article. 1. Basis for Comparing Two or More Entities A key advantage of ratios is that they provide a basis for comparison. It is impossible to compare two absolute figures (from different companies or sources) and to draw a meaningf…

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Average Stock Retention Period Ratio

The average stock retention period ratio provides another way to examine the average stock and rate of stock turnover. It is calculated to show the period, in weeks or months, for which stock remains with a business before it is sold off. Obviously, if the rate of stock turnover is high, the average stock retention period will be low, and vice versa. The average stock retention period (in weeks) i…

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Average Period of Credit Received

Average period of credit received is calculated in weeks (or months) in order to determine how long a company takes to pay off its trade creditors. It is incorrect to assume that a company that is successful in having a long credit received period is efficient. Like everything else in the world, credit comes at a price. If a company takes too long to settle its trade payables, it will suffer from…

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Average Credit Allowed Period

The average credit allowed period is another way of stating the debtors turnover ratio. It is calculated in terms of the number of weeks (or months) taken by each debtor—on average—to pay off their debt to the company. As you might expect, if the rate of debtors turnover is high, the average credit allowed period will be low. Conversely, if the rate of debtors turnover is low, this indicates a hig…

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Accounts Receivable Turnover Ratio

Definition The accounts receivable turnover ratio, also known as the debtors turnover ratio, indicates the effectiveness of a company’s credit control system. Much like the inventory turnover ratio, the accounts receivable turnover ratio shows how many times debtors are extended credit that they fully repay each year. It is calculated as shown below. Formula For Accounts Receivable Turnover Ratio…

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Quick Ratio or Acid Test Ratio

Quick Ratio: Definition The quick ratio or acid test ratio is the ratio of quick assets to all current liabilities in a business. Quick assets for this purpose include cash, marketable securities, and good debtors only. In other words, prepaid expenses and inventories are not included in quick assets because there may be doubts about the quick liquidity of inventory. Quick Ratio: Explanation The q…

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Current ratio

Current Ratio: Definition The current ratio or working capital ratio is a ratio of current assets to current liabilities within a business. In other words, it is defined as the total current assets divided by the total current liabilities. The current ratio is one of the oldest ratios used in liquidity analysis. It measures the number of times that the current liabilities can be paid using the com…

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