Define five types of liquidity ratios
1. Current Ratio: This ratio is used to measure the company’s short-term liquidity, which is the ability of the firm to pay its current liabilities. This ratio is calculated by dividing the current assets by current liabilities.
2. Quick Ratio: This ratio is also known as the acid-test ratio. It helps to measure the company’s ability to meet its short-term financial obligations without relying on inventory. This ratio is calculated by dividing the quick assets by current liabilities.
3. Cash Ratio: This ratio measures the company’s ability to pay off its short-term obligations using cash and its equivalents. This ratio is calculated by dividing the sum of cash and cash equivalents by the current liabilities.
4. Operating Cash Flow Ratio: This ratio measures the company’s ability to pay off its short-term debts using its operating cash flows. This ratio is calculated by dividing the operating cash flow by current liabilities.
5. Net Working Capital Ratio: This ratio measures the company’s ability to meet its obligations on time by using its current assets, especially the working capital. This ratio is calculated by subtracting current liabilities from current assets.
Sure! Here are five types of liquidity ratios commonly used in financial analysis:
1. Current Ratio: This ratio measures a 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. A higher current ratio indicates better liquidity.
2. Quick Ratio (Acid-Test Ratio): This ratio is similar to the current ratio, but excludes inventory from current assets. It provides a more conservative measure of liquidity by excluding less liquid assets. It is calculated by dividing current assets minus inventory by current liabilities.
3. Cash Ratio: This ratio focuses solely on a company's ability to cover its short-term liabilities with cash and cash equivalents. It is calculated by dividing cash and cash equivalents by current liabilities. A higher cash ratio indicates a stronger liquidity position.
4. Operating Cash Flow Ratio: This ratio assesses a company's ability to generate cash from its core operations to cover its short-term obligations. It is calculated by dividing cash flow from operations by current liabilities.
5. Working Capital Ratio: This ratio measures the excess of a company's current assets over its current liabilities. It is calculated by subtracting current liabilities from current assets. A positive working capital ratio indicates a company's ability to meet its short-term obligations.
These liquidity ratios help assess a company's short-term financial health and its ability to meet its immediate obligations.