liquidity ratio junyup, dachan and rithvik. liquidity ratios calculates how easily a firm can pay...
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Liquidity ratioJunyup, Dachan and Rithvik
Liquidity Ratios
• Calculates how easily a firm can pay its short term financial obligations.
• 2 main liquidity ratios:• Current ratio- deals with firm’s liquid assets
and short term liabilities.• Acid Test- Ignores stock when measuring the
short term liquidity, therefore it is stricter.
Current Ratio Acid Test Ratio (quick ratio)• Deals with firm’s liquid
assets.
• Helps to reveal firm’s ability to use liquid assets to cover short term debts.
• Current ratio of 1.5-2.0 is desirable (if under- short term debts>liquid assets. If over- business may be holding current assets in unprofitable form).
• Deals with firm’s liquid assets but ignore stocks when measuring short term liquidity.
• A stricter test for liquidity.
• Ratio should be at least 1:1 otherwise firm might experience liquidity crisis. If it’s too high, firm could be holding onto too much cash rather than using it effectively.
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