One Determinant of Short-Term Liquidity Ratio
The single most important determinant of short-term liquidity ratio is that the current assets of an organization should be in excess to its short-term obligations, as examined by current and quick ratios. This is so because when an organization has more current assets than liabilities, it would be easier for the entity to generate revenue and repay creditors on time. Moreover, excessive short-term assets than obligations can also help the company finance its working capital operations efficiently. Because of this determinant of excessive current assets than obligations, an organization can provide higher safety margin to creditors’ investments .
Making Technical Adjustments to Ratios
An analyst may make technical adjustments to ratios in three different conditions. First, when the company has some accounts while others are absent. For instance, if any company only makes cash sales, an analyst can use cash sales in receivable turnover. Even though this company may not have credit sales, yet there must be some amount supposed to be received from clients or subsidiaries. Secondly, when ratios of one company are to be compared with those of other businesses in the same industry in which case analysts are allowed to make technical adjustments to ratios. When comparing one company’s ratios are compared to industry norms or standards, such adjustments are allowed .
Instances where Making Technical Adjustments to Ratios is Prohibited
Once an analyst gains access to adjusted, not reported, financial figures of any company, making adjustments to ratios is disallowed. Similarly, when it is impossible to compare ratios of one company to the other or industry averages, analysts cannot make adjustments to financial ratios. Even though ratios of different companies are comparable, analysts are prohibited from making unnecessary adjustments when the accounting standards and derivation of adjusted figures follow the same structure. If ratios change for any non-financial reason, analysts cannot keep adjusting ratios to arrive at the desired figure.
References
Maheshwari, S., & Maheshwari, S. (2009). Advanced Accountancy Volume-II. Vikas Publishing House.
Pratt, S. P. (2006). The Market Approach to Valuing Businesses. John Wiley & Sons.
