Liquidity Ratio Part Two

Liquidity Ratio Part Two

When looking at a company’s financial details while considering investment, a significant item to review is various types of liquidity ratio. This represents a company’s capability in satisfying short-term debt obligations. You absolutely need to know this kind of stuff if you are going to be investing on your own in 2018.

We will take a look at some of the key points of an organization’s liquidity ratio, starting with the debt service coverage ratio, or DSCR. The interest coverage ratio measures the ability of a company to pay the interest on their outstanding debts. However, there are other commitments besides interest payments that a company is liable to pay. These include the principal of the debt, lease rentals and principle amount of other interest-free loans. Moreover, since debts are paid out of cash flows, creditors are interested in the amount of cash flow the company earns annually instead of operating profits. The debt service coverage ratio, or the DSCR is a liquidity ratio that measures the ability of a company to pay the interest and principle of all long-term debt. It is calculated as:

Debt Service Coverage Ratio = (PBT+ Depreciation+ Other non-cash charges+ … Read the rest

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