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Liquidity Ratios - Assignment Example

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Liquidity Ratios

High existing and acid test ratios would mean that funds have without cause increased and are not being profitably used. Similarly, a strangely high rate of record earnings may show that a firm is losing profits, deteriorating to maintain an sufficient level of record to serve the customer’s needs. Rapid proceeds from debtors may show severe credit policies that hold proceeds below levels that could be obtained by granting more liberal firms (Khan & Jan, 2007). While determining the short term level of the organization by the creditors, it should be documented that the administration may be tempted to get involved in window dressing just prior to financial statements preparation so as to the present financial position better than what it actually is. For instance, by putting off purchases, allowing records to go down below the ordinary levels, using all existing cash to reimburse present liabilities, and increasing the compilation of funds from debtors, the existing and acid test ratios, and debtor turnover ratios may be unnaturally enhanced, even when no purposeful effort has been made to present a good picture (Khan & Jan, 2007). Capital Structure Ratios Financial ratios are referred to as capital structure ratios. Creditors who take longer time to recover their credit would censor the capability of a firm on the foundation of the lasting financial power in terms of its capacity to pay the interests frequently as well as pay back the principal on due dates, or in one sum at the point of maturity. Capital structure ratios can also be referred to as financial ratios which open up the long-term solvency of a firm as shown in its capability to guarantee the long-term lenders with respect to intermittent payment of interest during the duration of the loan and reimbursement of the principal upon maturity, or in predetermined installments on established dates (Brag, 2012). There are thus two versions of the long term solvency of a business. The first version is the capability to reimburse the principal when due while the second aspect involves the ability to undertake regular payment of the interests. For that reason, there are two dissimilar, but equally dependent and interconnected, kinds of capital structure costs. First, there are ratios which are based on the connection between rented funds and the owner’s capital. These ratios are calculated from the balance sheet, and have several variations such as debt equity ratio, debt asset ratios, and equity assets ratios. The second type of capital structure ratios, commonly called coverage ratios, are computed from the profit and loss accounts. Included in this category are interest coverage ratio, dividend coverage ratio, total fixed charges coverage ratio, cash flow coverage ratio and debt services coverage ratio (Brag, 2012). Increasing Activity Ratios but Declining Profitability As revenues are squeezed across the health care trade, providers and health plans that formerly avoided the Medicaid market have collaborated up to fight for medical patients. In the early 1990s, there was a sharp growth in contribution in the Medicaid market - a growth that included all segments of the market and all forms of ownership status and profit. Efforts to expand choice for Medicaid beneficiaries through commercial administrated care plans have recently encountered some problems. Since 1997, commercial plans exited the Medicaid market in much greater numbers than in earlier years and entered new Medicaid market less ...Show more


Liquidity Ratios Liquidity ratios establish an institution’s capability to get resources whenever it is required. When an institution does not have enough access to capital, it may lose its capability to control profitability thereby declining behind its bills…
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