Instructions

Calculate and analyze liquidity ratios. The two principal liquidity ratios are the current ratio and the quick ratio. The current ratio is current assets divided by current liabilities. The quick ratio is more conservative as it excludes inventory and other current assets from the numerator. In general, the higher the ratio the stronger the liquidity position.

Calculate and analyze leverage ratios. The two principal leverage ratios are debt to equity and debt to assets. Both compare a company’s ability to pay off debt with a dollar of assets or equity. The debt-to-equity ratio equals total liabilities divided by shareholders’ equity and the debt-to-assets ratio equals total liabilities divided by total assets. In general, the higher the ratio, the higher the risk.

References

Resources

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