Liquidity Metrics

What this video covers

• The current ratio formula and why it includes inventory, versus the quick ratio (acid test) formula and why it strips inventory out as the least liquid current asset
• Why working capital is a dollar amount (current assets minus current liabilities), not a ratio, and how that differs from the current ratio which expresses the same underlying concept as a fraction
• How the cash collection cycle works: days inventory outstanding (DIO) plus days sales outstanding (DSO) minus days payables outstanding (DPO), and why a shorter cycle means faster cash recycling
• The three turnover ratios (receivables, inventory, payables): their formulas, what faster turnover means in each case, and the critical numerator mismatch (receivables uses revenue; inventory and payables use cost of goods sold)
• Why free cash flow yield uses market capitalization in the denominator, never enterprise value, since the yield concept measures free cash flow per dollar of equity purchased
• How net debt is calculated (total debt minus cash and equivalents), why it strips out balance-sheet cash that could retire debt overnight, and why it appears inside the enterprise value formula
• The capital-structure liquidity metrics including operating cash flow (CFO), debt-to-capital, and debt-to-equity, and how they differ from short-term liquidity ratios in purpose and interpretation