Liquidity ratio Junyup, Dachan and Rithvik. Liquidity Ratios Calculates how easily a firm can pay its short term financial obligations. 2 main liquidity.

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Liquidity ratio Junyup, 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 RatioAcid 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 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.