Liquidity Ratios

The liquidity ratios indicate the liquidity

position of a company. They, in fact
measure the ability of a company to
meet its current liabilities as they fall
due.

The following are the important

liquidity ratios:
1. Current ratio: this is a fundamental
measure of a companys financial
condition, namely, its ability to meet
normal operating obligations. The
current ratio compares the total current
assets with the total current liabilities.

Current ration=current
assets/current liabilities

2. Acid-test ratio/Liquid
ratio/Quick ratio: It provides an
even more critical look at the ability
of the company to meet its day-today obligations. it signifies a very
short-term liquidity of a business
concern and is, therefore also called
as liquid ratio.
Acid test ratio=Current Assets(stock)/Current Liabilities

3. Receivables turnover: It indicates

the number of times that the average
outstanding net receivables is turned
over, or converted into cash through
collections during the year.
Receivable Turnover=Net
Sales/Average Receivables
*Average Receivables=Receivables
at the beginning Receivables at the
end/2

4. Inventory turnover: The liquidity of

inventories is measured by the number of
times per year that inventory is converted
into cost of goods sold. Hence, it is a
device to measure the efficiency of the
inventory management.
Inventory Turnover=Cost of Goods
Sold/Average Inventory