[Accounting]
[Principles of accounting]
I am of an opinion that an arrange of financial ratios for a specific company gives us an opportunity to judge under which financial conditions a firm currently stays, if it is going through a period of crisis and is about to go bankrupt, either having perfect financial position. In order to estimate the value of a business, we should compare financial ratios to the standard level, to ratios in a previous period and to average financial rates in the industry. However, we should take into account that unpredictable financial risks or the existence of force majeure circumstances may significantly influence on business activity and hit the financial position.
Liquidity ratios are needed to be computed in order to determine and estimate the business’s ability to pay debts. This is an indicator which shows if a firm has enough current assets to cover obligations when they are due. Before investing in a business, investors need to determine and evaluate rates of two main liquidity ratios: current ratio and quick ratio, as these financial ratios can indicate if a business is available to pay its debts.
Liquidity ratios sometimes incorporate the accounts receivable turnover and the inventory turnover indexes, which are further categorized as activity ratios. ("What is a liquidity ratio? | AccountingCoach", 2016)
In order to make the right decision, investors typically should prepare a financial report, calculate and analyze ratios, check whether working capital is adequate, because if the business has a positive level of financial accountability, it will be much easier for financiers make capital investments into a firm.
References
What is a liquidity ratio? | AccountingCoach. (2016). AccountingCoach.com.
Retrieved 1 June 2016, from http://www.accountingcoach.com/blog/liquidity-ratio
