Liquidity Ratios

Liquidity Ratios measure the ability of a company to pay

maturing obligations from its current assets.
There are two commonly used liquidity ratios:

 Current Ratio
The current ratio is a liquidity ratio that measures a
company's ability to cover its short-term liabilities (those
due within one year) with its short-term assets (assets that
can be converted into cash within one year).
Formula:
Current Ratio = Current Assets ÷ Current Liabilities
A current ratio greater than 1 indicates that a company has
more current assets than current liabilities, which suggests
it has the ability to pay off its short-term obligations. A
ratio significantly above 1 may indicate excess liquidity,
while a ratio below 1 suggests potential liquidity problems.
Example 1:

Current Ratio = Current Assets ÷ Current Liabilities

Current Ratio = 9,714,796,000 ÷ 7,333,157,000
= 1.324776764
= 1.32
Example 2:

Current Ratio = Current Assets ÷ Current Liabilities

Current Ratio = 250,000 ÷ 100,000
= 2.5

 Acid-Test Ratio or Quick Asset Ratio

The quick asset ratio, often called the acid-test ratio, is
a more conservative liquidity measure than the current ratio.
It assesses a company's ability to meet its short-term
liabilities using only its most liquid assets, excluding
inventory, which may not be easily convertible to cash in the
short term.
Formula:
Quick Asset Ratio = (Cash + Current A/R + Short-term
Marketable Securities) ÷ Current Liabilities
or
Quick Asset Ratio = (Cash - Inventories) ÷ Current Liabilities
A quick asset ratio greater than 1 indicates that the
company can meet its short-term obligations using its most
liquid assets, without relying on the sale of inventory. This
ratio provides a stricter assessment of liquidity than the
current ratio and is useful for evaluating a company's ability
to cover immediate financial obligations
Example 1:

Quick Asset Ratio = (Cash - Inventories) ÷ Current Liabilities

Quick Asset Ratio = (5,230 - 678) ÷ 2,457
= 1.85
Example 2:

Quick Asset Ratio = (Cash + Current A/R + Short-term

Marketable Securities) ÷ Current Liabilities
Quick Asset Ratio = (20 + 25 + 15) ÷ 145
= 0.4
 The current ratio considers all current assets and
liabilities, the quick asset ratio focuses on the most liquid
assets, providing a more conservative measure of a company's
ability to meet its short-term financial commitments. Both
ratios are crucial for investors, creditors, and management in
making informed decisions about a company's financial health
and risk.