Of all the Solvency ratios why is only the financial leverage ratio the one that uses "average" values?作者: soddy1979 时间: 2011-7-13 16:36
In all Liquidity and Solvency ratios, both numerator and denomenator are Balance Sheet items, so there is no need for taking average values.
However, you already know that Balance Sheet shows 'as of date' values. It is a snapshot of figures at a particular point in time. Now, as an analyst, sometimes you may want to take 'average' values instead of 'ending' values, specially when there has been a big change in values between two periods and you think those changes will not sustain.作者: cchang 时间: 2011-7-13 16:36
Yes gazhoo, agreed.
In this case, I am trying to justify why when both the items are from Balance Sheet, still it is using 'average' values.
In case of leverage, it shows firms target capital structure. And target capital structure may change in the course of a year. This is because, firm will strive for lowest cost of capital. And in course of one year, because of any change in external/internal conditions, this capital structure may change.
So, it may be appropriate to use 'average' values for this ratio, even though both numerator and denomenator are coming from balance sheet.作者: Finalnub 时间: 2011-7-13 16:36
got it. Thanks. By the way how is studying going? You are writing level 2 in June right?作者: disiz64 时间: 2011-7-13 16:36
I have not yet started for L2. I will probably start end of December.
I am taking CTP in first week of December. So far, I have been quite slow there. Have completed 3 modules out of 7.
