This is expressed as a ratio X : 1. Most agree that X should = 1.5-2.0 for an appropriate safety
margin to be maintained. If the ratio is too low, the business would be in deep trouble if
creditors demanded payment, whilst being too high means that they should invest some of
their money in more long-term investments.
This ratio is more accurate because often stock is very difficult to turn into cash. The ratio
should be at least 1:1 for the business to be in a good position. Otherwise, they are at risk of
a liquidity crisis.
This looks at how well a business is performing, compared to the amount they had invested.
Much of the data is on the data booklet. This should be compared to the interest rate
offered by banks, to see which investment is the more worthwhile.
A high ratio shows high dependence on that source of finance. They are also more likely to suffer financial difficulties. In order to determine the acceptability of the ratio, the business must consider their size, interest rates and potential profitability
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