xpense management strategies have also been implemented at the company, suggesting that the lackluster earnings per share performance is unlikely to be repeated in coming years.
Three liquidity ratios are common used to determine the ability of a company to meet its current (short-term) obligations. These are the current ratio, the acid test ratio and the inventory to net working capital ratio. The current ratio (current assets divided by current liabilities) measures the extent to which the claims of short-term creditors are covered by assets that are expected to be converted to cash in a period roughly corresponding to the maturity of the liabilities. The acid test (also called the quick ratio) is the same as the current ratio, with the exception that inventory is deducted from the current assets. The acid test ratio measure the firm's ability to pay short-term creditors without relying on the sale of its inventory. The inventory to net working capital ratio measure the extent to which the firm's working capital is tied up in inventory.
The chart on the next page illustrates that although the current ratio has fallen from a high of 2.35 in 1988 to a low of 1.21 in 1991, the ratio has remained steady during the last four years, and increased slightly from 1991 to 1992. As might be expected, the acid test ratio has performed similarly, reaching a low in 1990, and climbing to its highest level since 1988 during 1992. This indicates that the company is growing steadily less dependent on sales of inventory to meet its current obligations. The inventory to net working capital ratio climbed steadily until 1992, when it dropped a full point. Strong inventory control methods can help keep this value from growing to an excessive level.
Leverage ratios measure the level to which financing is obtained from creditors as opposed to provided by owners. The following chart illustrates three key leverage ratios for MicroAge from 19...