Below is the list of Liquidity Ratios
Current Ratio
Acid Test Ratio
Current Ratio
Quick Ratio
Networking capital
Working Capital
Working Capital Ratio
What is Liquidity Ratios
Liquidity Ratios used to measure the ability of the company to meet its short term current obligations. TO measure the ability of the company to pay off its short term current liabilities most of the companies as well as investors use the liquidity ratios.
If the result of the liquidity ratio is 1 then short term obligation fully covered by the company. With high liquidity ratio company have a high margin of safety because of which company can easily cover its current obligations.
Generally, a company has a high margin of safety if the calculation result of a liquidity ratio of the company is greater then 1 and such type of company has good financial health. If the liquidity ratio of the company is less then 1 then the margin of safety of such company is low and the financial health of such a company is not good. If the liquidity ratio result is equal to 1 then the margin of safety is very low and such type of company is not considered good for the investors.
Current Ratio, Acid Test Ratio, Cash Ratio, Quick Ratio, and working capital ratio are the most common examples of the liquidity ratio. The analyst considers different types of assets relevant to the liquidity ratio. Cash and cash equivalent mostly used to meet short term liabilities in an emergency because of which analyst consider only cash and cash equivalent as relevant assets. In addition to cash and cash equivalent, some analysts consider the debtors and trade receivable as receivable.
For the understanding of the liquidity ratio in a better way, the concept of the cash cycle is very important. Through the operations of the company the cash continuously cycle.
Below are the definitions of the most popular liquidity ratios
Current Ratio: Current ratio calculated by dividing the current assets by current liabilities. Current assets represent the cash, debtor, inventory, bill receivable. Current liabilities represent the sundry creditors, bills payable, outstanding expenses, and so on. If the company want to maintain the current ratio of 3:1 then for every 1 dollar of current liability, the company has 2 dollars of current assets.
Liquid Ratio: Liquid Ratio can be calculated by dividing the quick assets by current liabilities. Quick assets represent all current assets except inventory and prepaid expenses. Current liabilities represent all the liabilities mentioned in the above definition of the current ratio. 1:1 is the ideal liquid ratio because by having this ratio company covert all of its assets quickly into cash. With this ratio for every 1 dollar of current liabilty, there is 1 dollar of quick asset.
Cash Ratio: Cash Ratio can be calculated by dividing the sum of cash, Bank balance, stock, mutual funds by the current liabilities. The company wants to stable the cash ratio is equal to 1 or greater than 1 so that the company can easily pay the current liabilities without delay.
Net Working Capital Ratio: Net Working Capital Ratio can be calculated by dividing the Working capital by the Total Assets and multiply it by the 100. By the difference of current assets and current liabilities working capital calculated and total assets are all types of assets of the company. If the ratio result is high then the company has enough cash flow to pay the liabilities. If the ratio result is low then it is the problem for the company to pay the liabilities.
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