ratios!! (1 Viewer)

[max]

What are good liquidity ratios/gearing ratios should businesses strive for??
Just say they give u a business and its too liquid etc... what is a more desired liquidity or gearing ratio?

 

[truly-in-bliss]

Gearing:
Generally, anything less than 60% is satisfactory geared, any higher would be highly geared



Liquidity

2:1 = good

1:1 in an electricity biz would be acceptable because the cash flow can be more accurately predicted. However, this is not a good ratio for a manufacture. Thus biz needs to compare it with their industry averages.

 

[sneaky pete]

There is no perfect debt/equity (gearing ratio). It depends on too many factors.

This article can outline much better than I could, so I will just quote directly from it.


http://www.blonnet.com/2002/05/02/stories/2002050200670900.htm

blonnet.com
To find the location of the optimal capital structure for your company, you need to consider how much it would enjoy the benefits of borrowing and the extent to which the costs would prevent it from doing so.

blonnet.com
Different businesses have different abilities to handle the risk of financial distress. For example, a well-established, mature company with many marketable assets can cope with a financial crisis more easily. In bad times, it can simply cut its investment and wait for better economic conditions. It can also sell some of its assets to cover the interest payments. Such an organisation can, therefore, bear higher borrowing and enjoy the associated benefits.

On the other hand, a small company with mainly intangible assets would find it much harder to handle financial hardship. Firms in this category should use lower borrowing in their investment funds, as should companies whose products require long-term after-sales service.

blonnet.com
In theory, the optimal capital structure does exist, ... so it depends on the financial manager to make a professional judgment.

Sorry if it's long but hopefully you can understand the main point.

Like above post says, an acceptable current ratio is 2:1.
Absolute minimum would be 1:1.

Ways of increasing the liquidity of a business include:

• Paying some debts.
• Increasing your current assets from loans or other borrowings with a maturity of more than one year.
• Converting non-current assets into current assets.
• Increasing your current assets from new equity contributions.
• Putting profits back into the business.

I jotted down those above points from an internet site but I can't find it anymore :| so im not saying I made them up but feel free to use them if you need in the exam tommorow.

 

[2late]

On comment Qs...

If there's past figures / industry norms remember to always compare the ratios. Improvement or Decline?

If there aren't any past figures say it is difficult for comparison as there's nothing to base it again.

 

[Dash]

For all the ratios refer to the financial managment link in the categories