What is Current Ratio?The correct way to measure the current ratio is to divide current assets by current liabilities.$$\mathrm{Current\: Ratio\:=\:\frac{Current\: Assets}{Current\: Liabilities}}$$Here, current assets include items that are short-term in nature. Both assets and liabilities in the current ratio are meant for items that exist within one year from the date of calculation. As the current ratio is a measure of the short-term solvency of a firm, items that are valid beyond one year are not considered in the calculation.Current AssetsCurrent assets in the calculation of the current ratio include cash and cash equivalents, and items that can be converted ... Read More

What is a Quick Ratio?Cash is an indispensable resource for business firms as cash works as a fuel to run business operations successfully. Lack of cash may push a company to insolvency which is an inability to pay the current expenses. Long-term insolvency may push firms to bankruptcy. Therefore, knowing the position of a company in terms of available cash or liquidity is of utmost importance for the firm. Here’s where the quick ratio comes in handy.A quick ratio is an indicator of a firm’s ability to meet short-term expenses. In simple, it can be termed as the indicator of ... Read More

Leverage ratios show the debt position of a company. Debt is an important part of finance for a firm. While debt is necessary to fund projects, excessive debt can be a sign of financial illness of a firm. In fact, both excess and too less availability of debt is detrimental for a firm.As debt ratios show relationships with other items, they can be an eye-opener for management, owners, and investors. An optimum level of debt not only shows the good financial health of a company, but also means that the company would grow in the near and long-term future without ... Read More

Purpose of Leverage Ratio CalculationTo determine the long-term financial position of a company, its financial leverage is calculated. The method of increasing shareholder’s return using debt is known as Financial Leverage. Leverage ratios are, thus, connected to the processes where debt is used to magnify the shareholder’s returns.In fact, excessive debt is a risky proposition for a firm. It has to pay interests to the lenders when a firm acquires debt. Moreover, the debt providers may also ask for payment when the pre-set duration of lending ends. A firm is obligated to pay the lender's amount back within a specified ... Read More

What is Liquidity Ratio?The ratio which measures the capability of a firm to meet its current obligation is known as liquidity ratio. This ratio derived its name from ‘liquidity’ referring to ‘the cash deposits available’.As a result, liquidity ratios are helpful in determining the firm’s ability to meet its short- and long-term liquidity needs. Liquidity ratios form a relationship between cash and other forms of assets to show the firm’s ability to meet its current obligations (current liabilities).Uses of Liquidity RatioLiquidity ratios are used to measure the liquidity position of a company. Usually, high equity is considered to be good ... Read More

What is Leverage Ratio?Creditors and lenders invest money in a firm looking for returns at different points in time. Short-term creditors, such as bankers and raw materials suppliers are usually more interested in the short-term liquidity of the firms they invest in. On the other hand, the long-time creditors, such as debenture holders and institutional investors look for the long-term health of a firm.In order to be termed healthy, therefore, a firm should be able to meet its short- as well as long-term obligations. To ascertain the long-term potential of a firm, financial leverage or capital restructure ratios are used. ... Read More

Pro-Forma Ratio AnalysisPro-forma is a Latin word meaning ‘for the sake of form’. A Pro-forma analysis is a way to project the financials of a firm in a future period. In order to create Pro-forma analysis historical data is used as the base of accounting. Therefore, Pro-forma ratio analysis can be termed as a way of accounting that uses data from the past to forecast the results in the future.Sometimes, Pro-forma analysis is also used to omit the irregularities of accounting. For example, instead of projecting the future position, a Pro-forma report may show the performance of the company if ... Read More

Although people consider cross-sectional and time-series analysis to be the same; however, they are totally different in many aspects.Based on Use and Nature of DataThe main difference between cross-sectional and time series analysis is in their use of data. Moreover, the data collected for time series and cross-sectional analysis are different in nature too.The difference between cross-sectional data and time-series data is that time-series data considers the same variables over a certain period of time, whereas cross-sectional data uses different data for a given point in time. It means that time-series data are stable, whereas the data used in the ... Read More

What is Cross-Sectional Analysis?Cross-Sectional analysis is one of the handiest tools in comparing the performance of companies. Usually, companies within a given industry are tested with a chosen metric in cross-sectional analysis. It is not only correct, but it is also quite accurate in measuring the true financial potential of a company.Cross-sectional analysis is an analysis of specific data of a population or study of the pre-set subjects at a certain period of time. In finance, cross-sectional analysis is used to compare the performance of companies. The cross-sectional analysis offers insight into the performance of a company on a given ... Read More

What is Time Series Analysis?In order to evaluate the performance of a company, its past can be compared with the present data. When comparisons of past and present data are done, the process is known as Time Series Analysis. Time series are stretched over a period of time rather than being confined to a shorter time period. Time series analysis draws its important because it can help predict the future. Depending on the past and future trends, time series are able to predict the future.Time series analysis is helpful in financial planning as it offers insight into the future data ... Read More