The liquidity of a business firm is measured by its ability to satisfy its long term obligations as they become due? Comment.
Yes, it is true that the liquidity of a business firm is measured by its ability to pay its long term obligations as they become due. Here the long term obligation means payments of principal amount on the due date and payments of interests on the regular basis. For measuring the long term solvency of any business we calculate the following ratios.
Debt Equity Ratio:
Debt equity indicates the relationship between the external equities or outsiders funds and the internal equities or shareholders funds. It is also known as external internal equity ratio. It is determined to ascertain soundness of the long term financial policies of the company.
Following formula is used to calculate debt to equity ratio:
Debt Equity Ratio = External EquitiesShareholders′ Funds OrOutsiders FundsInternal Equities
Proprietory Ratio/Total Assets to Debt Ratio:
Total assets to Debt Ratio or Proprietary Ratio are a variant of the debt equity ratio. It is also known as equity ratio or net worth to total assets ratio. This ratio relates the shareholders' funds to total assets. Proprietory/Equity ratio indicates the long-term or future solvency position of the business.
Formula of Proprietory/Equity Ratio is:
Proprietory or Equity Ratio = Sharehoders′ FundsTotal Assets
Fixed Assets to Proprietor’s Fund Ratio:
Fixed assets to proprietor’s fund ratio establish a relationship between fixed assets and shareholders’ funds. The purpose of this ratio is to indicate the percentage of the owner’s funds invested in fixed assets.
The formula for calculating this ratio is as follows:
Fixed Assets to Proprietor's Fund = Fixed AssetsProprietors Fund
Interest Coverage Ratio:
This ratio deals only with servicing of return on loan as interest. This ratio depicts the relationship between amount of profit utilize for paying interest and amount of interest payable. A high interest coverage ratio implies that the company can easily meet all its interest obligations out of its profit.
Interest Coverage Ratio =Net Profit before Interest and TaxInterest on Long−term Loans
Yes, it is true that the liquidity of a business firm is measured by its ability to pay its long term obligations as they become due. Here the long term obligation means payments of principal amount on the due date and payments of interests on the regular basis. For measuring the long term solvency of any business we calculate the following ratios.
Debt Equity Ratio:
Debt equity indicates the relationship between the external equities or outsiders funds and the internal equities or shareholders funds. It is also known as external internal equity ratio. It is determined to ascertain soundness of the long term financial policies of the company.
Following formula is used to calculate debt to equity ratio:
Debt Equity Ratio = External EquitiesShareholders′ Funds OrOutsiders FundsInternal Equities
Proprietory Ratio/Total Assets to Debt Ratio:
Total assets to Debt Ratio or Proprietary Ratio are a variant of the debt equity ratio. It is also known as equity ratio or net worth to total assets ratio. This ratio relates the shareholders' funds to total assets. Proprietory/Equity ratio indicates the long-term or future solvency position of the business.
Formula of Proprietory/Equity Ratio is:
Proprietory or Equity Ratio = Sharehoders′ FundsTotal Assets
Fixed Assets to Proprietor’s Fund Ratio:
Fixed assets to proprietor’s fund ratio establish a relationship between fixed assets and shareholders’ funds. The purpose of this ratio is to indicate the percentage of the owner’s funds invested in fixed assets.
The formula for calculating this ratio is as follows:
Fixed Assets to Proprietor's Fund = Fixed AssetsProprietors Fund
Interest Coverage Ratio:
This ratio deals only with servicing of return on loan as interest. This ratio depicts the relationship between amount of profit utilize for paying interest and amount of interest payable. A high interest coverage ratio implies that the company can easily meet all its interest obligations out of its profit.
Interest Coverage Ratio =Net Profit before Interest and TaxInterest on Long−term Loans
