Ratios

aimeexox

Im struggling to explain the following ratios:

Gearing Ratio

Current Ratio

Quick Ratio

Does anyone know a simple explanation of them? With the current ratio and the quick ratio i dont really understand what the :1 means. I know the ideal is supposed to be 2:1 does it just mean your assets need to be able to cover your liabilities so your always able to pay the money you owe out of the company?

Primble

aimeexox wrote: »

Im struggling to explain the following ratios:

Gearing Ratio

Current Ratio

Quick Ratio

Does anyone know a simple explanation of them? With the current ratio and the quick ratio i dont really understand what the :1 means. I know the ideal is supposed to be 2:1 does it just mean your assets need to be able to cover your liabilities so your always able to pay the money you owe out of the company?

i may be wrong but i think current and quick are the same thing?

Rinske

I think the current ratio is the one where you leave the stock in and the quick ratio is the acid test where you remove the stock.

The :1 means that if you have an answer of 2:1 you would be able to cover your short term liabilities twice with the current value of your short term (liquid) assets. This shows how well you can cover your short term debts when they fall due with the money that is available straight away or in short term.

If you have a ratio of 1:1, it means you would be able to pay the debts just about. It means if you have a 0.5:1 ratio, it might be slightly problematic if your short term debts all fall due at the same time.

(The :1 is basically just to point out you compare the current assets with the current liabilities and the :1 is a mathematical representation of the current liabilities. At least that's what I've been told.)

Primble

Rinske wrote: »

I think the current ratio is the one where you leave the stock in and the quick ratio is the acid test where you remove the stock.

The :1 means that if you have an answer of 2:1 you would be able to cover your short term liabilities twice with the current value of your short term (liquid) assets. This shows how well you can cover your short term debts when they fall due with the money that is available straight away or in short term.

If you have a ratio of 1:1, it means you would be able to pay the debts just about. It means if you have a 0.5:1 ratio, it might be slightly problematic if your short term debts all fall due at the same time.

(The :1 is basically just to point out you compare the current assets with the current liabilities and the :1 is a mathematical representation of the current liabilities. At least that's what I've been told.)

doh silly me. i new it was the same as another ratio thats similar. current assets - stock/current liabilities?

Rinske

Current ratio = current assets/ current liabilities = ..:1
Quick ratio = current assets - stock / current liabilities = ..:1
So yep, you got it right.

(Just sneakily double checked in my ratio's list)