Liquidity Ratios
Business Tools for Career Readiness
Finance for Non-Financial Professionals Module 3
with David Standen, D.B.A.
Liquidity Ratios • A class of financial metrics
Liquidity Ratios • A class of financial metrics • Used to determine a company's ability to pay off its short-term debt obligations
Liquidity Ratios • A class of financial metrics • Used to determine a company's ability to pay off its short-term debt obligations • The higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts
Liquidity Ratios:
Working Capital Ratio •
Indicates whether a company has enough short term assets to cover its short term debt.
Liquidity Ratios:
Working Capital Ratio •
Indicates whether a company has enough short term assets to cover its short term debt. Working Capital Ratio = Current Assets / Current Liabilities
Liquidity Ratios:
Working Capital Ratio •
Indicates whether a company has enough short term assets to cover its short term debt. Working Capital Ratio = Current Assets / Current Liabilities
o Anything below 1 indicates negative W/C o Anything over 2 means the company is not investing excess assets o Most believe a ratio between 1.2 and 2.0 is sufficient
Liquidity Ratios:
Quick Ratio (Acid Test) •
Measures a company’s ability to meet its shortterm obligations with its most liquid assets
Liquidity Ratios:
Quick Ratio (Acid Test) •
Measures a company’s ability to meet its shortterm obligations with its most liquid assets.
Quick Ratio = (current assets – inventories) / current liabilities
Liquidity Ratios:
Quick Ratio (Acid Test) •
Measures a company’s ability to meet its shortterm obligations with its most liquid assets
Quick Ratio = (current assets – inventories) / current liabilities •
Excludes inventories from current assets
•
Measures the dollar amount of liquid assets available for each dollar of current liabilities
•
The higher the quick ratio, the better the company's liquidity position
Finance for Non-Financial Professionals Module 3
with David Standen, D.B.A.
Liquidity Ratios • A class of financial metrics
Liquidity Ratios • A class of financial metrics • Used to determine a company's ability to pay off its short-term debt obligations
Liquidity Ratios • A class of financial metrics • Used to determine a company's ability to pay off its short-term debt obligations • The higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts
Liquidity Ratios:
Working Capital Ratio •
Indicates whether a company has enough short term assets to cover its short term debt.
Liquidity Ratios:
Working Capital Ratio •
Indicates whether a company has enough short term assets to cover its short term debt. Working Capital Ratio = Current Assets / Current Liabilities
Liquidity Ratios:
Working Capital Ratio •
Indicates whether a company has enough short term assets to cover its short term debt. Working Capital Ratio = Current Assets / Current Liabilities
o Anything below 1 indicates negative W/C o Anything over 2 means the company is not investing excess assets o Most believe a ratio between 1.2 and 2.0 is sufficient
Liquidity Ratios:
Quick Ratio (Acid Test) •
Measures a company’s ability to meet its shortterm obligations with its most liquid assets
Liquidity Ratios:
Quick Ratio (Acid Test) •
Measures a company’s ability to meet its shortterm obligations with its most liquid assets.
Quick Ratio = (current assets – inventories) / current liabilities
Liquidity Ratios:
Quick Ratio (Acid Test) •
Measures a company’s ability to meet its shortterm obligations with its most liquid assets
Quick Ratio = (current assets – inventories) / current liabilities •
Excludes inventories from current assets
•
Measures the dollar amount of liquid assets available for each dollar of current liabilities
•
The higher the quick ratio, the better the company's liquidity position
