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Key ratios - liquidity

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Discuss This Topic

Prematee M.

the acquisition of a daily bank balance plus the current day's cash collections less possibly creditors and other payments results would put one in a better position to determine the day to day short term debts settlement.

Bikash G.

what is the liquidity ratio and it formula?

Fehintola K.

Quick asset ratio still makes use of Current asset, I don't understand what makes it a quick ratio

Fehintola K.

what is the difference between Working Capital Ratio and Quick Ratio

Timia W.

What is a bank overdraft mentioned in the quick asset ratio?

Text Version

XSIQ
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Accounting - Key ratios - liquidity

Key ratios - liquidity

Liquidity is the ability of the firm to meet its short term debts.

RATIO
FORMULA
EXPLANATION

LIQUIDITY

1. Working capital ratio
Current assets/current liabilities
The working capital ratio attempts to measure the ability of the
business to meet short term obligations. Working capital is current assets
minus current liabilities. It is difficult to define what is an adequate
working capital. Too high a working capital indicates ineffective use of
funds whilst insufficient working capital means difficulty meeting
obligations.

2. Quick asset ratio
Current assets less stock and prepaid expenses/current liabilities less
bank overdraft
This ratio is a more urgent measure of liquidity. It does not include
items that are not so quickly converted to cash. The bank overdraft has
been regarded as an obligation not immediately called for. Some
definitions, however, no longer regard this as always being true so do not
deduct from current liabilities. It is probably a better measure of
liquidity than working capital.

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