The Importance of Financial Stability Indicators

General relationship with the judge concerned about the financial stability of corporate leverage ratio, current ratio and liquid ratio. Gearing ratio shows the dependence of the extent of debt to finance their activities. As part of the debt climbs (especially if it exceeds 65 percent of the total number of companies), the greater the risk of financial hardship. This is a negative leverage - It increases the financial risk. Current ratio measures the number of times current assets cover current liabilities from the company. This is a solvency measure: of the company to pay its debts through normal cash cycle, capacity, sales inventory credit, collecting debts and paying creditors. This ratio must be greater than 1:1 and should be closer to 2:1. It should also be noted that the excess of current assets would be a bad use of property. Liquid or quick ratio is a more stringent measure of short-term financial stability. It measures their ability to cover its current liabilities from liquid assets. Liquid assets are cash or near cash resources. In practice, liquid assets include cash, bank, short-term securities and receivables, assets that are readily convertible into cash to meet immediate payment of calls from lenders and suppliers. Receivables are generally included in liquid assets, as they can be sold to finance the company off the latest collection from debtors. This is known as debt factoring. Debt factoring is not common in all countries. Debt factoring is used to manage the cash flow from operations, rather than trying to subject the funds to be received and arrangements. In arriving at its liquid assets, mainly short-term assets are not stocks. As it may take several months to sell - then often a credit to customers - it may be many months before the cash is collected from the reserve. Among the current commitment may be some debts that can not be, because for many months. This may not be included in the calculation of the ratio of the liquid. Examples include a charge current and long-term debt, both of which can be paid for several months. However, such changes should only be made if the repayment dates are known and are within six months of the latest balance sheet date. One common (but risky) the adjustment calculation of the ratio of liquid is to identify a bank overdraft of current liabilities. It is not recommended. When the liquid ratio decreases towards (or below) 1:01 level (including overdraft), it is probably time that the bank will require a return - on demand. Hence, the overdraft should be left to the calculation, when the enterprise is in liquid form - When the matter anyway! Because these figures are based on the statement of financial position, although they represent only a "snapshot" of financial stability, the business has at least one point in time. These relationships can be manipulated by the national payments or delaying purchases until the next period, or invoices to customers in advance of delivery. Known as "window dressing", these methods show improved solvency position at the balance sheet date.