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Ok ratios are pretty straight forward as long as we have formulas and numbers but i have some questions.
1. For “current ratio” and “gearing ratio”, both formula contains of current liabilities and non current liabilities. What if we as a company, doesnt have both liabilities? Can we still calculate the ratio? Or just treat it as N/A?
2. For “interest cover”, what if we as a company, doesnt have interest? Can we still calculate it? Or just treat it as N/A?
For example, interest cover = Profit before interest and tax / interest expense, 1000 / 0 = error
1. The current ratio and the gearing ratio do not contain both current and non-current liabilities!!
The current ratio only contains current liabilities, and the gearing ratio only contains non-current liabilities.In exam questions there will always be current liabilities (if there were not then the ratio is not relevant). There might not be non-current liabilities, in which case the gearing is zero. However this is not a maths exam – the only purpose of calculating ratios is to be able to discuss the relevant of the figures.
2. If there are no non-current liabilities and therefore no interest payable, the interest cover is not relevant.
Just want to double confirm
1. Capital employed = Total assets – Current liabilities OR Total equity + Non-current liabilities
2. Total equity = Total assets – Current liabilities – Non-current liabilities
Am i right for both statement?
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