liquidity ratio

Examples of liquidity ratio in the following topics:

• Liquidity Ratios

  • Liquidity ratios measure how quickly assets can be turned into cash in order to pay the company's short-term obligations.
  • Liquidity ratios measure a company's ability to pay short-term obligations of one year or less (i.e., how quickly assets can be turned into cash).
  • A high liquidity ratio indicates that a business is holding too much cash that could be utilized in other areas.
  • A low liquidity ratio means a firm may struggle to pay short-term obligations.
  • This ratio reveals whether the firm can cover its short-term debts; it is an indication of a firm's market liquidity and ability to meet creditor's demands.

• Liquidity

  • Liquidity, a business's ability to pay obligations, can be assessed using various ratios: current ratio, quick ratio, etc.
  • For a corporation with a published balance sheet, there are various ratios used to calculate a measure of liquidity.
  • The liquidity ratio (acid test) is a ratio used to determine the liquidity of a business entity.
  • Liquidity ratio expresses a company's ability to repay short-term creditors out of its total cash.
  • The liquidity ratio is the result of dividing the total cash by short-term borrowings.

• Current Ratio

  • Liquidity ratio expresses a company's ability to repay short-term creditors out of its total cash.
  • The liquidity ratio is the result of dividing the total cash by short-term borrowings.
  • Acid Test - a ratio used to determine the liquidity of a business entity.
  • The current ratio is an indication of a firm's market liquidity and ability to meet creditor's demands.
  • High liquidity means a company has the ability to meet its short-term obligations.

• Classification

  • Ratio analysis consists of calculating financial performance using five basic types of ratios: profitability, liquidity, activity, debt, and market.
  • Most analysts think of financial ratios as consisting of five basic types:
  • Activity ratios, also called efficiency ratios, measure the effectiveness of a firm's use of resources, or assets.
  • Market ratios are concerned with shareholder audiences.
  • Classify a financial ratio based on what it measures in a company

• Ratio Analysis and EPS

  • Financial ratios are categorized according to the financial aspect of the business which the ratio measures .
  • Acid-test ratio (Quick ratio): (Current assets - Inventory - Prepayments) / Current liabilities
  • Times interest earned ratio (Interest Coverage Ratio): EBIT / Annual interest expense
  • Return on assets (ROA ratio or Du Pont Ratio): Net income / Average total assets
  • Ratio analysis includes profitability ratios, activity (efficiency) ratios, debt ratios, liquidity ratios and market (value) ratios

• Quick Ratio (Acid-Test Ratio)

  • In finance, the Acid-test (also known as quick ratio or liquid ratio) measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately.
  • Cash and cash equivalents are the most liquid assets found within the asset portion of a company's balance sheet.
  • Acid test often refers to Cash ratio instead of Quick ratio: Acid Test Ratio = (Current assets - Inventory) / Current liabilities.
  • Note that Inventory is excluded from the sum of assets in the Quick Ratio, but included in the Current Ratio.
  • The higher the ratio, the greater the company's liquidity will be (better able to meet current obligations using liquid assets).

• Acid Test Ratio

  • The acid-test ratio, also known as the quick ratio, measures the ability of a company to use its near cash or quick assets to immediately extinguish or retire its current liabilities.
  • The acid-test ratio, like other financial ratios, is a test of viability for business entities but does not give a complete picture of a company's health.
  • In contrast, if the business has negotiated fast payment terms with customers and long payment terms from suppliers, it may have a very low quick ratio yet good liquidity .
  • In general, the higher the ratio is, the greater the company's liquidity (i.e., the better able to meet current obligations using liquid assets).
  • The acid-test ratio is similar to the current ratio except the value of inventory is omitted from the calculation.

• Current Ratio

  • The current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months.
  • The current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months.
  • Along with other financial ratios, the current ratio is used to try to evaluate the overall financial condition of a corporation or other organization.
  • The ratio is an indication of a firm's market liquidity and ability to meet creditor's demands.
  • The current ratio can be use to evaluate a company's liquidity.

• Selected Financial Ratios and Analyses

  • Ratios can identify various financial attributes of a company, such as solvency and liquidity, profitability (quality of income), and return on equity.
  • A publicly traded company's stock price can also be a variable used in the computation of certain ratios, such as the price/earnings ratio.
  • As with quality of sales, high levels for this ratio are desirable.
  • The current ratio is used to determine a company's liquidity, or its ability to meet its short term obligations.
  • When comparing two companies, in theory, the entity with the higher current ratio is more liquid than the other.

• Total Debt to Total Assets

  • The debt ratio is expressed as Total debt / Total assets.
  • Financial ratios are categorized according to the financial aspect of the business which the ratio measures.
  • Debt ratios measure the firm's ability to repay long-term debt.
  • Like all financial ratios, a company's debt ratio should be compared with their industry average or other competing firms.
  • Companies with high debt/asset ratios are said to be "highly leveraged," not highly liquid as stated above.