Question

Understand how short-term liquidity and long-term solvency measures are calculated and used

Answer 1

Short term liquidity of the firm is calculated so as to know whether a firm is able to meet it's short-term obligations and avoid any day-to-day working disturbances. Short term liquidity is important to keep the operational activity of the business smooth. Current Ratio and Quick Ratio is generally calculated to measure the short term liquidity of the firm. Generally, Suppliers and short-term traders are concerned with these ratios.

Long-term solvency matters a lot to the firm. It tells the financial positon and condition of the company. It tells whether a company is financially sound or not to pay it's debt and interest thereon. These ratios helps in determining the capital structure of the firm and measures the financial risk associated with the firm. Debt-Equity Ratio, Debt to total assets ratio, Interest Coverage ratio, Debt service coverage ratio are the few ratio which tells the long term solvency of the firm. These ratios generally matters to the long-term investors and money lenders.