A ratio larger than one indicates that a corporation can pay its existing debts. This ratio indicates if an individual or corporation can pay off short-term debts without support. Thus line pruning is consciously taken decision by the product manager to drop some product variants from the line. So when the products are not satisfactorily performing, the product managers need to drop them form the product line.

Absolute Liquidity Ratio:

(iii) Inter statement ratios exhibit the relationship between profit & loss account and balance sheet item. (ii)   Profit & Loss Account ratios deals with the relationship between two profits and loss account items. (i)     Balance Sheet ratios deal with the relationship between two balance sheet items. This includes cash in hand, cash at bank, sundry debtors, bills receivable, short term investment or marketable securities, stock and prepaid expenses. Current Assets are those assets, which are easily convertible into cash within one year. Liquidity ratios are otherwise called as Short Term Solvency Ratios.

Low liquidity ratios are a red flag, but the adage „the greater, the better“ is only accurate to a point. The fast asset is calculated by modifying current assets to exclude assets that are not in cash. When examining across sectors, liquidity ratio research may not be as helpful since different firms demand different funding arrangements. An internal study of liquidity ratios, for example, requires the use of various accounting periods, which are presented using the same accounting procedures. Comparative applications of liquidity ratios are the most useful. A ratio of one indicates that a company’s current assets are sufficient to cover all of its current obligations.

As regards sales, the ratio is best expressed when the average inventory is compared with the cost of goods sold. Average inventory and Cost of goods sold are the constituents of the ratio. This ratio indicates whether the investment in inventory is within proper limit or not. A very low ratio may signify that the firm is not taking full advantage of credit facilities allowed by the creditors. A high creditors turnover ratio signifies that the creditors are being paid promptly thus boosting up the credit worthiness of the firm. In fact these two ratios are inter-related.

Creditors Turnover Ratio:

Product augmentation leads the marketer to look at the user’s total consumption system i.e. the way the user performs the tasks of getting, using fixing and disposing of the product. Today’s competition essentially takes place at the product-augmentation level. At this level, the marketer prepares an augmented product that exceeds customer expectations.

Evaluate the investment’s meritInvestors use liquidity measures to assess organisations and decide if they are financially stable and deserving of their capital. Assess creditworthinessCreditors use liquidity measures to determine whether or not to offer credit to a firm. ●    Basic Defense Ratio This ratio calculates the number of days a firm can meet its cash costs without relying on outside finance. ●    Absolute Liquidity RatioThis ratio simply accounts for the company’s marketable securities and cash reserves. ●    Current RatioThis ratio assesses the company’s financial strength. In essence, a ratio of 2.0 indicates that a company’s existing liabilities may be covered twice over.

From the above ratio, it is clear that for every rupee worth of current liabilities, there are current assets worth Rs.1.67. Current Ratio may be defined as the ratio of current assets to current liabilities. It measures the firm’s capacity to pay off currentobligations immediately and is a more rigorous test of liquidity than thecurrent ratio. A high liquid ratio is an indication that the firm is liquidand has the ability to meet its current or liquid liabilities.

Product Levels:

In other words it might be profitable for the company to leave behind some of the variants. In this process the product lines become unduly complicated and long with too many variants, shapes or sizes. Then the company may try to boost demand for the short sellers especially if they are produced in a factory that is idled by lack of demand.

Classification, Computation & Interpretation of Liquidity and Turnover Ratios

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With liquidity ratios, there is a balance between a company being able to safely cover its bills and improper capital allocation. This ratio only considers a company’s most liquid assets – cash and marketable securities. If the payment is in cash then current assets will be reduced whereas current liabilities will remain at the same figure. It is also known as Acid test or liquid Ratio, is a more rigorous test of liquidity than the current ratio. (The weighted current ratio is considered to be the more reliable than the ordinary current ratio as a measure of liquidity)

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• A group of products within the product family recognised as having a certain functional coherence.
• It is also known as Acid test or liquid Ratio, is a more rigorous test of liquidity than the current ratio.
• From the above ratio, it is clear that for every rupee worth of current liabilities, there are current assets worth Rs.1.67.
• In this process the product lines become unduly complicated and long with too many variants, shapes or sizes.
• When ratios fall out of standards, the reasons for such results should be ascertained, and then conclusions can be arrived at.

A ratio of less than one indicates that a corporation is unable to meet its present liabilities. Ratios greater than 1.0 are desired due to the structure of the balance, which places assets on top and liabilities on the bottom. At times a company finds that over the years it has introduced many variants of a product in the product line. The company has 3 choices in naming its down-market products. A company can lengthen its product line in 2 ways viz. The average depth of HLL’s product mix can be calculated by averaging the depths of all brands, which signifies the average depth of each product.

What Happens If Ratios Show a Firm Is Not Liquid?

• When used in conjunction with current ratio, the liquid ratio gives a better picture of the firm’s capacity to meet its short-term obligations out of short-term assets.
• (The current ratio 2.5 means that current assets are 2.5 times of current liabilities.)
• The ratio is calculated as the ratio of financial resources to current obligations.
• A ratio of one is preferable to less than one, although it is not optimal.
• Note that in our example, we will assume that current liabilities only consist of accounts payable and other liabilities, with no short-term debt.

The various liquidity ratios are; current ratio, liquid ratio and absolute ratio. The liquid ratio interpretation is made with reference to current assets excluding prepaid expenses and inventories i.e. liquid assets and current liabilities. The absolute liquidity ratio only uses only the super absolute liquid ratio quick currents assets which can be converted to cash within a very short time. Therefore, absolute liquidity ratio relates cash, bank and marketable securities to the current liabilities.

This ratio indicates the velocity of the utilization of net https://wotechtheme.com/2022/01/13/are-right-of-use-assets-really-depreciated-w-2/ working capital. Credit turnover ratio indicates the velocity with which the creditors are turned over in relation to purchases. Therefore, the analyst has no option but to use net sales though it would not include cash sales.

This refers to how many different product lines the company carries. A company’s product-mix has some attributes https://nymbiz.co.za/2023/04/08/how-to-check-an-ein-is-valid-verification-methods/ such as. An organisations product line is a group of closely related products that are considered a unit because of marketing, technical or end-use considerations. Some firms sell a single product; others sell a variety of products.