It is a liquidity ratio that measures a company's ability to pay short-term obligations.
Also known as "liquidity ratio", "cash asset ratio" and "cash ratio".
By putting to test a company's financial strength, deduces company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables).
The higher the current ratio, the more capable the company is of paying its obligations. An acceptable current ratio varies by industry. Generally, the more liquid the current assets, the smaller the current ratio can be without cause for concern. For most companies, 1.5 is an acceptable current ratio.
A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. As the number approaches or falls below 1 (which means the company has a negative working capital), investors and stakeholders need to take a close look at the business and make sure there are no liquidity issues. Companies that have ratios around or below 1 should only be those which have inventories that can immediately be converted into cash.
On the other hand a very high current ratio means that firm has much cash on hand, and that the management may be doing a poor job of investing it.
As seen in services industries, ITES companies generally tend to have a very high current ratio (2+) due to less debts and more retained incomes.
While all the three companies show high current ratios of over 2, Infosys has the highest current ratio of 3.28.
DEBT TO ASSETS RATIO
Long term financial strength or soundness of a firm is measured in terms of its ability to pay interest regularly or repay principal on due dates or at the time of maturity taking into account its assets.
The debt/asset ratio shows the proportion of a company's assets which are financed through debt.
If the ratio is less than one, most of the company's assets are financed through equity. If the ratio is greater than one, most of the company's assets are financed through debt.
Companies with high debt/asset ratios are said to be "highly leveraged," and could be in danger if creditors start to demand repayment of debt.
Generally a low debt to assets ratio is desirable.
Companies with high ratios place themselves at risk, especially in an increasing interest rate market. Creditors are bound to get worried if the company is exposed to a large amount of debt and may demand that the company pay some of it back.
As we see in the case of the ITES companies, the amount of debt taken is very less and their repayments can be easily covered by their assets as shown by their low debt to assets ratio.
Infosys has zero debt and thus can be said to have the best asset financing system of the three.
EQUITY RATIO = NETWORTH/TOTAL ASSET
The Equity Ratio is a good indicator of the level of leverage used by a company. The Equity ratio measures the proportion of the total assets that are financed by stockholders and not creditors.
Generally a high equity ratio is desirable as it implies excess of equity financing over debt. A low equity ratio can also produce good results for stockholders as long as the company earns a rate of return on assets that is greater than the interest rate paid to creditors. All the three companies have high equity ratios.Infosys with no debts has an equity ratio of 1.22 INTEREST COVERAGE RATIO
A ratio used to determine how easily a company can pay interest on outstanding debt. Alternatively, the interest coverage ratio is a measurement of the number of times a company could make its interest payments with its earnings before interest and taxes.
Higher the interest coverage ratio better is the firm’s ability to meet its interest burden whereas the lower the ratio, the higher the company’s debt burden.
Generally, a firm should try to have an interest coverage ratio of more than 1.5.
An interest coverage...
Please join StudyMode to read the full document