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- If more than one years balance sheet is available, a company being considered for investment can be assessed by calculating the liquidity and stability ratios ( or quick ratio and capitalisation ratio, to be concrete ).
- the calculation is (current assets total - inventory - pre-paids) divided by current liabilities for each year's balance sheet.
- If the quick ratio is going down and is significantly less than 1, then liquidity might be a future problem and the company might collapse. A quick ratio less than 1 means that if all the current liabilities are demanded, even by collecting all the current receivables and handing over all cash equivalent assets, there will still be remaining current liability.
- If the capitalisation ratio is > 2.5, then
liability/equity > 1.5
- try to work out if near current liabilities have been hidden in non-current liabilities, or that contingencies exist that would turn non-current liabilities into current liabilities.
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