Question

Comment on the following statements.

1. Capital structure ratio measures the ability of the company to meet its annual interests.
2. Cash ratio should not exceed one.
3. The higher the EPS the higher the pay-out ratio.
4. The higher the liquidity ratio, the riskier the company is.

5. Quick ratio is more conservative than cash ratio in measuring the company’s liquidity.
6. There a negative relationship between the DSO and Inventory turnover.
7. The longer the average selling period the better the company position in managing its inventory.
8. Profitability ratios measure the ability of the company to generate sales from using its assets.
9. Expected return is the only factor that the investor should consider in constructing the portfolio.
10. Hedging concept is important on Portfolio management.

Answer 1

· Capital structure ratios measures the firm sources of capital in different proportion and It shows whether the company is leveraged or not, It does not tell you about whether you can meet the annual interest.

· There is no strict criteria as to how much should be the cash ratio, it differs from company to company and their operating requirements and operating cycle.

· Higher the EPS, higher is the ability of the company to be able to pay the dividend but whether the company will follow a high payout ratio or not depends on the capital expenditure and other factors.

· Higher the liquidity ratio, there is low risk that the company will not be able to make its short-term liability obligation. So higher the liquidity ratio lower should be the risk.

· Cash ratio is more conservative than quick ratio because it only considers cash and cash equivalent securities whereas quick ratio also considers accounts receivable.

· It is correct there is an inverse relationship between DSO and inventory turnover, higher the inventory turnover lower would be the days of sales outstanding.

· The selling period should neither be too long or neither be too small both shows inefficiency and should be somewhere where the company can maximize the revenue and reduce the cost of holding the inventory.

· Profitability ratio measure the company ability to generate profits on its investment, asset turnover ratios shows the how the asset are being used to generate sales.

· For adding assets to the portfolio, the risk, correlation with other asset and time period in which the asset return can be generated should also be considered rather than just focusing on the expected return.

· Hedging is important concept in investment because the markets are very volatile and it is important to protect the capital against uncertainty or excess volatility in the market.