Liquidity Ratios - Meaning, Formula, Calculation & Interpretations

This tutorial will give you a detailed understanding of Liquidity Ratios, including their definitions, formulas, calculations, and interpretations. Here, you will learn about its three types - current ratio, quick ratio, and cash ratio.

What are Liquidity Ratios?
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Liquidity ratios are used to assess a company's ability to meet short-term financial obligations and sustain its short-term debt-paying capabilities.

Liquidity Ratios Formulas
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Current Ratio Formula = Current Assets / Current Liabilities
Quick ratio Formula = Quick assets / Quick Liabilities
= (Cash and Cash Equivalents + Accounts receivables) / (Current liabilities – Bank overdraft)
Cash Ratio Formula = Cash + Cash Equivalents / Total Current Liabilities

Relevance and Use
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Liquidity ratios help identify whether or not the company has enough liquidity to pay its short-term obligations, allowing it to plan its future course of action accordingly.
Investors, creditors, banks, and other stakeholders use it as part of their due diligence before extending credit or investing in the company.

For more details, you can refer to our article - https://www.wallstreetmojo.com/liquid...

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