D775 Introduction to Business Finance STUDY GUIDE: UNDERSTANDING FINANCIAL RATIOS AND CAPITAL MANAGEMENT 2025-2026 Western Governors University
1. Liquidity Ratios What they measure: Can the company pay its bills in the short term? Liquidity ratios tell you whether a company has enough "cash on hand" to cover what's due soon — like rent, supplies, or wages. Examples: •
Current Ratio – Do they have enough current assets (like cash or things they can quickly sell) to cover what they owe soon?
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Current Assets: Cash, accounts receivable, inventory, etc. (anything convertible to cash within 1 year). Current Liabilities: Debts due within 1 year (like accounts payable, short-term loans). Cash ratio - Measures the ability to pay current liabilities using only cash and cash equivalents.
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Quick Ratio – Measures the ability to pay short-term obligations with only the most liquid assets. (like cash and accounts receivable).
2. Profitability Ratios What they measure: Is the company making money? Profitability ratios show how good a business is at turning sales into actual profit. Examples: