Current Cash Debt Coverage Ratio

What is current cash debt coverage ratio? – Definition: Current cash debt coverage ratio is a liquidity ratio that is used to measure how efficient the entity is with its cash management. It shows the company’s relation to the operating cash flow received during an accounting period with the current liabilities it needs to clear. … Read more

Defensive Interval Ratio (DIR)

What is Defensive Interval Ratio (DIR)? Defensive interval ratio used to measure the cash-based liquidity and determines the number of days a Company/Organization 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). Defensive Interval Ratio is … Read more

Limitations of accounting ratios

Accounting ratios are a very powerful tool for analysis and planning. However, they are not without their limitations. Two principal limitations of accounting ratios are given below: (a) 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 … Read more

Uses and Advantages of Accounting Ratios

Accounting ratios are a very powerful tool for evaluating the performance of a business unit. The most important uses and advantages of accounting ratios are given below: (1). Basis for comparison of two or more entities The principal advantage of ratios is that they provide a basis for comparison. It is impossible to compare two … Read more

Average stock retention period ratio

Average stock retention period ratio provides another way of looking at average stock and rate of stock turn. This 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 turn is high, average stock retention period must … Read more

Average period of credit received

Average period of credit received ratio is calculated in weeks, or months, to ascertain how long does the company take to pay off its trade creditors. It is a fallacy to assume that a company that is successful in having a long credit received period is efficient. Like every thing else in the world, credit has a … Read more

Average credit allowed period

This is another way of stating the debtors turnover ratio. It is calculated in number of weeks (or months) taken by each debtor, on average, to pay his debt to the company. Obviously, if the rate of debtors turnover is high, average credit allowed period would be low. Conversely, if the rate of debtors turnover … Read more

Accounts Receivable Turnover Ratio

Accounts receivable turnover ratio ( also known as debtors turnover ratio) shows the effectiveness of the company’s credit control system. Much like inventory turnover ratio, accounts receivable turnover ratio shows how many times in a year debtors are given credit and they fully repay it. It is calculated as follows: Formula of Accounts Receivable Turnover … Read more

Quick ratio or acid test ratio

Quick ratio Definition Quick ratio or acid test ratio is the ratio of quick assets to all current liabilities. 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 a doubt in quick liquidity of inventory. … Read more

Current ratio

What is Current Ratio? – Definition Current ratio or working capital ratio is a ratio of current assets to current liabilities of 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 … Read more