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FAQs
What is the meaning of liquidity ratio? ›
It's a ratio that tells one's ability to pay off its debt as and when they become due. In other words, we can say this ratio tells how quickly a company can convert its current assets into cash so that it can pay off its liability on a timely basis.
What's a good liquidity ratio? ›Generally, a good Liquidity Ratio should be above 1.0. This indicates the company has enough current assets to cover its short-term liabilities. A higher Liquidity Ratio (above 2.0) shows the company is in a stronger financial position and may have spare cash available for investments or other opportunities.
What are the 4 liquidity ratios? ›Liquidity Ratio Formula
| Liquidity Ratios | Formula |
|---|---|
| Current Ratio | Current Assets / Current Liabilities |
| Quick Ratio | (Cash + Marketable securities + Accounts receivable) / Current liabilities |
| Cash Ratio | Cash and equivalent / Current liabilities |
| Net Working Capital Ratio | Current Assets – Current Liabilities |
A current ratio of 1.5 would indicate that the company has $1.50 of current assets for every $1 of current liabilities. For example, suppose a company's current assets consist of $50,000 in cash plus $100,000 in accounts receivable. Its current liabilities, meanwhile, consist of $100,000 in accounts payable.
What liquidity ratio is too high? ›Current ratio
If the ratio is higher, 4:1 it could mean that the firm is inefficient and has too much money tied up in stock. On the other hand, a lower ratio value of 1:1 would mean that it may not be able to meet its debts quickly.
Types of liquidity ratios
- Current Ratio = Current Assets / Current Liabilities.
- Quick Ratio = (Cash + Accounts Receivable) / Current Liabilities.
- Cash Ratio = (Cash + Marketable Securities) / Current Liabilities.
- Net Working Capital = Current Assets – Current Liabilities.
Types of Liquidity Ratios
- Current Ratio = Current Assets / Current Liabilities.
- Quick Ratio = (Cash + Accounts Receivables + Marketable Securities) / Current Liabilities.
- Cash Ratio = (Cash + Marketable Securities) / Current Liabilities.
Liquidity is a company's ability to convert assets to cash or acquire cash—through a loan or money in the bank—to pay its short-term obligations or liabilities. How much cash could your business access if you had to pay off what you owe today —and how fast could you get it? Liquidity answers that question.
What is the difference between liquidity and profitability? ›Focus - Liquidity focuses on cash, assets that can quickly become cash, and short-term liabilities. Profitability focuses on profits in relation to revenue, assets, equity, and other inputs. Indications - Higher liquidity suggests greater short-term financial health.
Is 0.8 a good liquidity ratio? ›Generally, a Quick Ratio of 1.0 or greater is considered adequate to ensure a company's ability to pay its current obligations.
Why is high liquidity bad? ›
Substantial increases in liquidity — or ratios well above industry norms — may signal an inefficient deployment of capital. Prospective financial reports for the next 12 to 18 months can be developed to evaluate whether your company's cash reserves are too high.
What is a good debt ratio? ›If your debt ratio does not exceed 30%, the banks will find it excellent. Your ratio shows that if you manage your daily expenses well, you should be able to pay off your debts without worry or penalty. A debt ratio between 30% and 36% is also considered good.