Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 236

importance of the current ratio. Assets refer to the value of everything that a company has and owns: not only cash on hand, but also items such as accounts receivable (payments the company is expected to collect) and inventories expected to be turned over, among other things.

Quick Ratio - This ratio is pretty much the same as the current ratio, only stricter. Items such as inventories or accounts receivable are deducted from the total assets value. In other words, the quick ratio is a company's liquid assets, such as cash and other investments that can be quickly converted to cash, divided by its liabilities. For example, a company with a quick ratio of 0.9 has enough cash to cover 90% of its expenses in the coming year. Should you be worried if you are invested in a company with a quick ratio of less than one? Not necessarily. Remember that the quick ratio is a strict test to see if the company's current cash holdings can satisfy its upcoming obligations. Many companies would have access to more cash throughout the year by collecting on their accounts receivable, selling inventories, securing financing from a bank, issuing more stocks, or selling more bonds.

Debt Ratio - This ratio is a company's total (long- and short-term) debt divided by its book value. Using this value one can determine how much of a company's assets are based on borrowed money. This is important because these debts eventually need to be paid back and the company's ability to meet these obligations is important to its continued operation. Generally you would want a company to have a small debt ratio. A debt ratio of one means that half of the company's assets come from creditors, such as loans and bonds. A high debt ratio reflects the fact that the company is borrowing heavily to meet its obligations. This may be acceptable for a company wishing to expand quickly, but as debt piles up and this ratio continues to increase, the company had better deliver good earnings at some point to repay. Otherwise bankruptcy and eventual liquidation could follow. And with


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