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statements and evaluating its operations. The analysis concentrates only on variables directly related
to the company itself, rather than the stocks price movement or the overall state of the market.
Liquidity Ratio
Analysis
Liquidity ratios are used to determine a companys ability to meet its
short-term debt obligations. Investors
often take a close look at liquidity
ratios when performing fundamental
analysis on a rm. Since a company
that is consistently having trouble
meeting its short-term debt is at a
higher risk of bankruptcy, liquidity
ratios are a good measure of whether
a company will be able to comfortably continue as a going concern.
Any type of ratio analysis should be
looked at within the correct context.
For instance, investors should always
look at a companys ratios against
those of its competitors, its sector
and its industry and over a period of
several years. In this issues Fundamental Focus, we investigate liquidity ratios using time-series analysis,
competitive analysis and sector and
industry analysis.
As an example of how to properly
examine liquidity ratios, we will
use the nancial statement data for
J. Alexanders Corp. (JAX) found in
AAIIs fundamental research database, Stock Investor Pro. While
you can access nancial statements
directly on company websites,
J. Alexanders only offers two years
of balance sheets at its site. For
our purpose of examining trends in
liquidity ratios, we need several years
of nancial statements in order to
gather all the data. And since Stock
Investor Pro contains yearly balance
sheet gures going back seven years,
our task is made much easier if we
Current Ratio
Quick Ratio
The quick ratio, also known as the
acid-test ratio, is a liquidity ratio that
is more rened and more stringent
than the current ratio. Instead of
using current assets in the numera-
Cash Ratio
The cash ratio is the most conservative of the three liquidity ratios
covered in this article. As the name
implies, this ratio is simply the ratio
of cash and equivalents compared
to current liabilities. This ratio looks
only at assets that can be most easily
used to pay off short-term debt, and
it disregards receivables and shortterm investments. The argument for
using the cash ratio is that receivables
and short-term investments often
cannot be liquidated in a timely manner. Receivables can be sold, or monetized, but the rm will not be able
to get the full value of the receivables
sold. Keep in mind that, due to their
2010
$8,600
$2,700
$0
$1,300
$1,300
$13,900
$13,100
2009
$5,600
$3,400
$0
$1,300
$1,500
$11,800
$15,200
2008
$2,500
$3,900
$0
$1,400
$2,700
$10,500
$13,000
2007
$11,300
$3,400
$0
$1,300
$2,500
$18,500
$14,100
2006
$14,700
$2,300
$0
$1,300
$2,300
$20,600
$13,700
20
Computerized Investing
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