Liquidity Ratio Essay

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LIQUIDITY RATIO Ratio analysis expresses the relationship among selected items of financial statement data. Liquidity ratio is one of the three ratios, it measures short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash. Measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash. Short-term creditors such as bankers and suppliers are particularly interested in assessing liquidity. Ratios include the current ratio, the current cash debt coverage ratio, the receivables turnover ratio, the average collection period, the inventory turnover ratio, and average days in inventory. Current Ratio - Expresses the relationship of current assets to current liabilities. Calculate the current ratio for Kellogg for 2007 and 2006 What do the measures tell us? A current ratio of .67 means that for every dollar of current liabilities, Kellogg has $0.67 of current assets. Cash Debt Coverage Ratio - Because it uses cash provided by operating activities, it may provide a better representation of liquidity. Calculate the ratio for Kellogg for 2007 and 2006 Is the coverage adequate? Probably so. Kellogg’s coverage is better than that of General Mills, and it approximates a commonly accepted threshold of .40. Receivables Turnover Ratio – Measures the number of times, on average, a company collects receivables during the period. Calculate the ratio for Kellogg for 2007 and 2006. How does Kellogg’s turnover compare to General Mills’s? The turnover of 11.9 times compares favorably with the industry average of 11.5 times, but is lower than General Mills’s turnover of 13.3 times. Average Collection Period – Converts the receivable turnover ratio into days. Calculate the collection period for Kellogg for 2007 and 2006. How effective is Kellogg’s credit and
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