Account Info
Log Out
No matches yet
Operations too frequent. Please try again later.
Please check network settings and try again Refresh Refresh
Loading
History record delete
    Quotes All >
      News All >

        How to Read an Earnings Report

        Views 10K2023.11.14
        playBtn

        Decoding liquidity ratios

        A word that no investors want to hear in the stock market is bankruptcy.

        When a company declares bankruptcy, there's a good chance of the company's stock being worthless.  

        A company can go bankrupt for many reasons.

        One possibility is that a company is insolvent, which means its total liabilities exceed its total assets. In this case, investors can use solvency ratios such as the debt ratio to measure a company's long-term financial health.  

        A company may also go bankrupt if it faces a liquidity crisis. It means that the company doesn't have enough cash to pay short-term obligations like loans from banks, employee wages, or accounts payable to suppliers.

        So, how can we know if a company can pay off short-term obligations or not?

        There are three commonly used indicators: current ratio, quick ratio, and cash ratio.  

        Let's start with the current ratio, also known as the working capital ratio. It is calculated by dividing a company's current assets by its current liabilities.

        Current assets can be converted into cash within a year, such as cash, cash equivalents, accounts receivables, and inventory.

        Current liabilities are obligations a company must pay off within a year, including short-term debts, accounts payable, and wages.

        The current ratio tells investors whether a company has enough current assets to pay off its short-term obligations.

        In general, a number of 1.5 is considered acceptable.

        It indicates that a company has enough current assets to pay short-term obligations.

        If a company has a current ratio under 1.00, it means the company doesn't have enough assets to cover its short-term obligations, raising a red flag for investors.

        However, not all current assets can be liquidated instantly to pay off liabilities.

        For example, inventory is not as liquid as other current assets, and it may take the company weeks or months to sell. Therefore, investors sometimes may prefer to use the quick ratio, which is more conservative.

        The quick ratio equals dividing current assets, excluding inventory and prepaid expenses, by current liabilities.

        It measures a company's capacity to pay its current liabilities without selling its inventory.

        Generally speaking, a quick ratio of 1 is considered acceptable.

        It means that a company has enough assets to be instantly liquidated to pay off its current liabilities. The lower the ratio, the higher the risk of default.

        Compared to the two ratios mentioned earlier, the cash ratio is relatively more conservative.

        It focuses only on the most liquid assets, cash and cash equivalents, including savings accounts, money market accounts funds, and T-Bills.

        The formula to calculate the cash ratio is cash plus cash equivalents divided by current liabilities.

        If a company's cash ratio is greater than 1, it means that the company has more than enough cash at hand to pay off short-term debt.

        If a company's cash ratio is less than 1, the company may have difficulty paying off short-term obligations using cash.

        In general, higher liquidity ratios are better than lower ones. It means that a company is less likely to have a liquidity crisis.

        However, a ratio too high might not be a good sign. It may also suggest that the company doesn't use its assets efficiently.

        In addition, the liquidity ratio differs by industry. The business model also matters.

        For instance, retailers generally have lower quick ratios than most other industries as they have a large amount of inventory. So liquidity ratios are more suitable for comparing two companies in the same industry or comparing one company to the industry average.  

        To sum up, investors can use current, quick, and cash ratios to measure a company's ability to pay short-term liabilities.

        One should also consider the industry when using liquidity indicators.

        This marks the end of the video. See you next time.

        This presentation is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investment information provided in this content is general in nature, strictly for illustrative purposes, and may not be appropriate for all investors. It is provided without respect to individual investors’ financial sophistication, financial situation, investment objectives, investing time horizon, or risk tolerance. You should consider the appropriateness of this information having regard to your relevant personal circumstances before making any investment decisions. Past investment performance does not indicate or guarantee future success. Returns will vary, and all investments carry risks, including loss of principal. Moomoo makes no representation or warranty as to its adequacy, completeness, accuracy or timeline for any particular purpose of the above content.

        Moomoo is a financial information and trading app offered by Moomoo Technologies Inc.

        In the U.S., investment products and services available through the moomoo app are offered by Moomoo Financial Inc., a broker-dealer registered with the U.S. Securities and Exchange Commission (SEC) and a member of Financial Industry Regulatory Authority (FINRA)/Securities Investor Protection Corporation (SIPC).

        In Singapore, investment products and services available through the moomoo app are offered through Moomoo Financial Singapore Pte. Ltd. regulated by the Monetary Authority of Singapore (MAS). Moomoo Financial Singapore Pte. Ltd. is a Capital Markets Services Licence (License No. CMS101000) holder with the Exempt Financial Adviser Status. This advertisement has not been reviewed by the Monetary Authority of Singapore.

        In Australia, financial products and services available through the moomoo app are provided by Futu Securities (Australia) Ltd, an Australian Financial Services Licensee (AFSL No. 224663) regulated by the Australian Securities and Investment Commission (ASIC). Please read and understand our Financial Services Guide, Terms and Conditions, Privacy Policy and other disclosure documents which are available on our website https://www.moomoo.com/au.

        In Canada, order-execution only services available through the moomoo app are provided by Moomoo Financial Canada Inc., regulated by the Canadian Investment Regulatory Organization (CIRO).

        In Malaysia, investment products and services available through the moomoo app are offered through Futu Malaysia Sdn. Bhd. ("Moomoo MY")regulated by the Securities Commission of Malaysia (SC). Futu Malaysia Sdn. Bhd. is a Capital Markets Services Licence (License No. eCMSL/A0397/2024) holder. This advertisement has not been reviewed by the SC.

        Moomoo Technologies Inc., Moomoo Financial Inc., Moomoo Financial Singapore Pte. Ltd.,Futu Securities (Australia) Ltd, Moomoo Financial Canada Inc., and Futu Malaysia Sdn. Bhd. are affiliated companies.

        Recommended