Types of liquidity ratios
1. Current Ratio: Current assets divided by current liabilities. It measures the ability of a company to pay off its short-term obligations using its current assets.
2. Quick Ratio or Acid-Test Ratio: (Current assets - inventory) divided by current liabilities. This ratio measures a company's ability to meet its short-term obligations without having to sell its inventory.
3. Cash Ratio: Cash and cash equivalents divided by current liabilities. This ratio measures a company's ability to pay off its short-term liabilities using its most liquid assets.
4. Operating Cash Flow Ratio: Operating cash flow divided by current liabilities. This ratio measures a company's ability to pay off its short-term obligations using its operating cash flows.
5. Working Capital Ratio: Current assets minus current liabilities. This ratio measures the amount of capital a company has left to fund its operations after paying off its short-term obligations.
6. Net Working Capital Ratio: (Current assets minus current liabilities) divided by total assets. This ratio measures the ability of a company to meet its short-term obligations using its current assets in relation to its total assets.
7. Cash Conversion Cycle (CCC): Days inventory outstanding plus days sales outstanding minus days payable outstanding. This ratio measures the time it takes for a company to convert its inventory into cash after a sale has been made, minus the time it takes to pay its suppliers.
There are several types of liquidity ratios that measure a company's ability to meet its short-term obligations. The common liquidity ratios include:
1. Current Ratio: This ratio measures the company's ability to pay off its short-term liabilities with its short-term assets. It is calculated by dividing current assets by current liabilities.
Current Ratio = Current Assets / Current Liabilities
2. Quick Ratio (also known as the Acid Test Ratio): This ratio is more conservative than the current ratio, as it excludes inventory from current assets. It measures the company's ability to pay off its short-term liabilities using its most liquid assets.
Quick Ratio = (Current Assets - Inventory) / Current Liabilities
3. Cash Ratio: This ratio is the most conservative measure of liquidity, as it only considers the company's cash and cash equivalents (the most liquid assets) compared to its current liabilities.
Cash Ratio = Cash and Cash Equivalents / Current Liabilities
4. Operating Cash Flow Ratio: This ratio measures the cash flow generated from the company's operations against its current liabilities. It indicates the company's ability to generate enough cash from its core operations to meet its short-term obligations.
Operating Cash Flow Ratio = Operating Cash Flow / Current Liabilities
These ratios provide insights into a company's liquidity position and its ability to pay off its short-term liabilities. They are widely used by investors, creditors, and analysts to evaluate a company's financial health.