Community Forex Questions
How is liquidity ratio calculated?
Liquidity ratios are financial metrics used to assess a company's ability to meet its short-term obligations. The calculation of liquidity ratios involves comparing a company's liquid assets to its current liabilities. The most commonly used liquidity ratios are the current ratio and the quick ratio.
The current ratio is calculated by dividing current assets by current liabilities. Current assets include cash, marketable securities, accounts receivable, and inventory. Current liabilities encompass short-term debt, accounts payable, and other obligations due within one year. A higher current ratio indicates better short-term liquidity, as it suggests that a company has sufficient current assets to cover its current liabilities.
The quick ratio, also known as the acid-test ratio, is a more stringent measure of liquidity. It excludes inventory from current assets since inventory may not be easily converted to cash in a short period. The quick ratio is calculated by subtracting inventory from current assets and dividing the result by current liabilities. This ratio provides a more conservative assessment of a company's ability to meet its short-term obligations.
By calculating these liquidity ratios, investors and analysts gain insights into a company's ability to pay off debts and cover expenses in the short term. These ratios are valuable tools for assessing a company's liquidity position and making informed investment or lending decisions.
The current ratio is calculated by dividing current assets by current liabilities. Current assets include cash, marketable securities, accounts receivable, and inventory. Current liabilities encompass short-term debt, accounts payable, and other obligations due within one year. A higher current ratio indicates better short-term liquidity, as it suggests that a company has sufficient current assets to cover its current liabilities.
The quick ratio, also known as the acid-test ratio, is a more stringent measure of liquidity. It excludes inventory from current assets since inventory may not be easily converted to cash in a short period. The quick ratio is calculated by subtracting inventory from current assets and dividing the result by current liabilities. This ratio provides a more conservative assessment of a company's ability to meet its short-term obligations.
By calculating these liquidity ratios, investors and analysts gain insights into a company's ability to pay off debts and cover expenses in the short term. These ratios are valuable tools for assessing a company's liquidity position and making informed investment or lending decisions.
The liquidity ratio measures a company's ability to meet short-term obligations using its most liquid assets. Key liquidity ratios include:
1. Current Ratio:
Current Ratio = Current Assets/Current Liabilities
This ratio indicates how well a company can cover its short-term liabilities with its short-term assets.
2. Quick Ratio (Acid-Test Ratio):
Quick Ratio = Current Assets -Inventor/ Current Liabilities
It provides a more stringent measure by excluding inventory, which may not be quickly convertible to cash.
3. Cash Ratio:
Cash Ratio =Cash and Cash Equivalents/Current Liabilities
This ratio evaluates the company's ability to pay off short-term debt with cash on hand.
These ratios help assess a company's short-term financial health and operational efficiency.
1. Current Ratio:
Current Ratio = Current Assets/Current Liabilities
This ratio indicates how well a company can cover its short-term liabilities with its short-term assets.
2. Quick Ratio (Acid-Test Ratio):
Quick Ratio = Current Assets -Inventor/ Current Liabilities
It provides a more stringent measure by excluding inventory, which may not be quickly convertible to cash.
3. Cash Ratio:
Cash Ratio =Cash and Cash Equivalents/Current Liabilities
This ratio evaluates the company's ability to pay off short-term debt with cash on hand.
These ratios help assess a company's short-term financial health and operational efficiency.
Jun 05, 2023 17:10