Liquidity Ratios are used to evaluate a company’s ability to repay short term and long term debt as risk indicators. There are up to eight ratios that are broken up over three categories.
Current Ratio measures the business ability to pay short term obligations within a year
- Current Ratio = Current Assets / Current Liabilities
Quick Ratio measures the business’ ability to pay its short term liabilities by having assets that are readily convertible into cash.
- Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities
Cash Ratio measures the company’s ability to pay off its short term debt with cash an cash equivalents.
- Cash Ratio = Cash and Cash Equivalents / Current Liabilities
Defensive Interval Ratio indicates how many days a company can operate without needing to tap into capital sources aside from its current assets.
- Defensive Interval Ratio = Current Assets / Daily Expenditures
Times Interest Earned Ratio measures the companies ability to meet its debt obligations on a periodic basis. This is used to calculate a company’s probability of default.
- TIE Ratio = Earnings Before Interest & Taxes / Interest Expense
Cash Flow Ratios
Times Interest Earned measures a company’s ability to make periodic interest payments on its debt obligations. This provides the probability a company will default on its loans.
- TIE = Adjusted Operating Cash Flow / Interest Expense
CAPEX to Operating Cash Ratio determines how much of the company’s cash flow from operations is being devote to capital expenditures. This helps measure a company’s focus on growth.
- CAPEX to Operating Cash Ratio = Cash Flow from Operations / Capital Expenditures
Operating Cash Flow measures how well a company can pay off its current liabilities with cash flow generated from its core orations.
- Operating Cash Flow Ratio = Cash Flow from Operations / Current Liabilities