Could ya pls give me a brief explanation and maybe egs for these stuff:
-liquidity
-gearing
-solvency
-cash flow ??
-working capital??
Textbook so confusing !!!!!!
PLEASE
!!
THANK YOU !!!
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Liquidity
The ability of a business to pay its short term financial commitments, such as the payment of overdrafts and commercial bills. Indicates the level of financial stability in the business in the short term. Effects aspects such as shareholders willingness to invest in the business. Measured by the current ratio, which involves the businesses current assets and current liabilities, obtained through the balance sheet. The recommended current ratio is 2:1, anything below that may have negative implications on the businesses financial stability yet is largely dependent on the nature of the businesses market, business size and previous financial records.
Current ratio too low (i.e. 0.5:1) not able to pay debts, bankruptcy
Current ratio too high (i.e. 5:1) inefficiency
Gearing
A measure of the level of debt in a business. Measured through the debt to equity ratio, if a business has a high amount of debt and low amount of equity it is highly geared. A highly geared business has a high level of financial risk and a low level of financial stability. Whilst a moderate level of gearing is desirable it is typically recommended for a business to keep a low level of gearing. Determines the businesses level of Solvency, a high level of gearing makes the business have a low level of solvency
Solvency
The ability of a business to pay its long term financial commitments. Such as mortgages, financial leases, debentures and unsecured notes. Measured through the businesses level of gearing. A business with low solvency discourages potential investors and increases financial risk
Cash flow
The movement of cash inflows and cash outflows from transactions over a period of time. Measured through the cash flow statement
Working Capital
The funds allocated to the businesses short term financial commitments. Managed through working capital management