5. Uses and Analysis of the Balance Sheet

g. convert balance sheets to common-size balance sheets and interpret common-size balance sheets;

h. calculate and interpret liquidity and solvency ratios.

What are the three liquidity ratios?
1. Current ratio
2. Quick ratio (acid-test ratio)
3. Cash ratio

What is the calculation for the current ratio?
$$current\ ratio = \frac{current\ assets}{current\ liabilities}$$

What is the calculation for the quick ratio (acid-test ratio)?
$$quick\ ratio = \frac{cash + marketable\ securities + receivables}{current liabilities}$$

What is the calculation for the cash ratio?
$$cash\ ratio = \frac{cash + marketable\ securities}{current\ liabilities}$$

What are the two solvency ratios?
1. Total debt ratio
2. Financial leverage ratio

What is the calculation for the total debt ratio?
$$Total\ debt\ ratio = \frac{total\ debt}{total\ assets}$$

What is the calculation for the financial leverage ratio?
$$Financial\ leverage\ ratio = \frac{total\ assets}{total\ equity}$$

Source:

• CFA