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Excel 2007: Financial Analysis

Calculating the current ratio and quick ratio


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Excel 2007: Financial Analysis

with Curt Frye

Video: Calculating the current ratio and quick ratio

In this lesson I'll discuss two very useful ratios, the current ratio and the quick ratio, also known as the acid test. If you want to evaluate a company's short -term financial health, one of the best ratios you can use is the current ratio, which compares a company's current assets to its current liabilities. A current asset is an asset that can be reasonably assumed to be converted to cash within one year. Current assets include cash, accounts receivable, and inventory. Similarly, a current liability is a liability that must be paid within one year.
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  1. 2m 6s
    1. Welcome
      1m 8s
    2. Using the exercise files
      32s
    3. Disclaimer
      26s
  2. 13m 20s
    1. Separating inputs and formulas
      2m 2s
    2. Avoiding common mistakes
      5m 39s
    3. Tracing formula precedents and dependents
      2m 52s
    4. Evaluating Excel formulas step by step
      2m 47s
  3. 18m 40s
    1. Tracking income and expenses using an Excel table
      3m 29s
    2. Creating a Pivot Table from table data
      3m 36s
    3. Pivoting a Pivot Table
      2m 22s
    4. Filtering a Pivot Table
      3m 11s
    5. Adding Pivot Table columns to enhance data analysis
      3m 5s
    6. Tracking cash flow using a Pivot Chart
      2m 57s
  4. 18m 48s
    1. Reading a corporate financial statement
      6m 1s
    2. Introducing common-sizing strategies for analyzing financial statements
      3m 59s
    3. Creating common-sized income statements
      3m 1s
    4. Creating common-sized balance sheets
      2m 53s
    5. Calculating percentage changes in financial statements
      2m 54s
  5. 8m 12s
    1. Calculating earnings per share
      1m 54s
    2. Calculating return on equity and return on assets
      2m 50s
    3. Calculating gross profit margin and net profit margin
      3m 28s
  6. 6m 19s
    1. Calculating the current ratio and quick ratio
      2m 47s
    2. Calculating the average collection period
      1m 56s
    3. Calculating inventory turnover
      1m 36s
  7. 6m 12s
    1. Calculating the equity ratio
      1m 26s
    2. Calculating the debt ratio
      2m 57s
    3. Calculating the times interest earned ratio
      1m 49s
  8. 10m 58s
    1. Calculating simple interest and compound interest
      3m 36s
    2. Applying nominal versus effective interest rates (APR versus APY)
      3m 21s
    3. Calculating the number of days between events
      4m 1s
  9. 13m 32s
    1. Computing the future value of an investment
      3m 30s
    2. Calculating present value
      2m 29s
    3. Calculating net present value
      2m 42s
    4. Calculating internal rate of return
      2m 24s
    5. Calculating NPV and IRR for uneven input periods (XNPV and XIRR)
      2m 27s
  10. 7m 30s
    1. Projecting future results using the Forecast function
      2m 9s
    2. Performing quick forecasts using the Fill handle
      2m 57s
    3. Adding a trendline to a chart
      2m 24s
  11. 22m 28s
    1. Introducing amortization
      2m 20s
    2. Calculating payments on a fully amortized loan
      2m 21s
    3. Calculating payments on a partially amortized loan (balloon payments)
      2m 4s
    4. Calculating interest and principal components of loan repayments
      5m 32s
    5. Introducing depreciation
      2m 1s
    6. Calculating straight line depreciation
      1m 30s
    7. Calculating declining balance depreciation
      3m 24s
    8. Calculating double declining balance depreciation
      3m 16s
  12. 9m 34s
    1. Introducing bonds and bond terminology
      1m 37s
    2. Calculating a bond's yield
      2m 15s
    3. Calculating the value of zero coupon bonds
      3m 18s
    4. Pricing bonds to be offered to investors
      2m 24s
  13. 23s
    1. Goodbye
      23s

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Excel 2007: Financial Analysis
2h 18m Intermediate Aug 25, 2009

Viewers: in countries Watching now:

Numbers and financial data drives today's business world and Excel 2007: Financial Analysis can help decode this information. The proper understanding of these numbers, and the formulas behind them, can be the gateway to corporate and personal success. Microsoft MVP (Most Valuable Professional) Curt Frye teaches basic fluency in corporate finance, enabling users to see the meaning behind essential financial calculations. Curt explains how to review formulas to ensure they have the proper inputs, and shows how to interpret formula output. He also covers how to calculate leverage ratios and amortization and depreciation schedules, as well as forecast future growth. Exercise files accompany this course.

Topics include:
  • Building a financial worksheet with Pivot Tables Reviewing financial statements through common-sized balance sheets Calculating percentage change over time in financial statements Determining profitability ratios and return on investments Studying liquidity and activity ratios through an average collection period Computing the future value of an investment
Subjects:
Business Data Analysis Finance
Software:
Excel
Author:
Curt Frye

Calculating the current ratio and quick ratio

In this lesson I'll discuss two very useful ratios, the current ratio and the quick ratio, also known as the acid test. If you want to evaluate a company's short -term financial health, one of the best ratios you can use is the current ratio, which compares a company's current assets to its current liabilities. A current asset is an asset that can be reasonably assumed to be converted to cash within one year. Current assets include cash, accounts receivable, and inventory. Similarly, a current liability is a liability that must be paid within one year.

To find a company's current ratio, you divide the value of current assets by the value of current liabilities. I have those values here in this worksheet. It's just data from a fictitious company, current assets and current liabilities. To calculate the current ratio, create a formula that divides current assets by current liabilities, and there is the result. Most healthy companies have a current ratio of at least 1 indicating that their assets are greater than their liabilities. You can also use the two values from the current ratio, current assets and current liabilities, to determine the company's working capital.

To calculate working capital, which is essentially the cash the company has on hand, you subtract current liabilities from current assets. So in this case we have B5, Current Assets, - B6, Current Liabilities, and there is the amount of working capital that you have. The higher the current ratio, the better. But a low current ratio most likely won't be a problem for a company that has the potential to borrow money to increase its cash on hand. Unless a company makes its money exclusively through consulting services or licensing its patents and other intellectual property, it will make its money by selling physical goods.

Goods in inventory must be sold to be converted to cash, so analysts developed the quick ratio. The philosophy behind the quick ratio is that because inventory is the least liquid asset, you should exclude it from the current assets calculation by subtracting the value of goods and inventory and then divide the new total by current liabilities. Here we have current assets and inventory is called out separately and we have current liabilities. So the quick ratio would be B5-B6 and divide that by B8 to get the quick ratio.

Now be aware that companies can alter their quick ratio by choosing when to make major purchases or sell off assets. If a company intends to buy patents or other intellectual property from another firm, you should take that into account if it looks like the deal has been reached before the end of a fiscal year. It's vital that you only use the quick ratio to compare companies with similar business models. A consulting firm, for example, would carry no inventory. So its quick ratio would be the same or very nearly the same as its current ratio. A department store chain, by contrast, would have a large inventory and therefore a much lower quick ratio than the consulting firm.

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