Liquidity Related Ratios

1. Current Ratio

This ratio can be calculated as follows,

Current Ratio = Current Assets/Current Liabilities

This ratio contemplates on identifying the organizations ability to meet shot term liabilities. Generally a ratio between 2 to 3 is considered good. The lower the ration it means that the company has difficulties in meeting the short term obligations.

In the case of lower ratio these variables can be further expanded. Liabilities within 3 months time, 6 months time, 9 months time, 12 months time and whether the current assets can be managed to meet the liabilities in a timely manner.

2. Cash to current Asset Ratio

This ratio can be simply calculated as follows,

Cash to CA = Cash/ Current Assets

This ratio will highlight the management of cash which the most liquid asset. Higher ratio could indicate that the company is holding on to cash without thinking of investment opportunities.

3. Quick Asset Ratio

Quick assets ratio only takes into account the most liquid assets and gives a better measurement of the company’s liquidity.

Quick ratio = Liquid current assets (Cash, securities, accounts receivables)/ Current liabilities

In this ratio the inventory and other low liquid assets are removed thus gives a good indication of the company’s ability to meet the current liabilities.

4. Cash Ratio

Cash ratio can be calculated as follows,

Cash Ratio = Cash and cash equivalents/ Current liabilities

In this ratio the account receivables are also removed and thus give an indication of the availability of immediate assets to cover up the current liabilities.

5. Receivable turnover Ratio

This ratio can be calculated as follows,

Receivable turnover ratio = Sales Revenue / average Receivables

Average receivables can be calculated as follows,

Average receivables = (Previous account receivables + current account receivables)/2

This provides an indicator of the company’s credit policy mainly. Higher ratio implies that the company is collects dues from its customers quickly. A high ratio compared to competition might indicate that the company’s credit policy somewhat risk averse where the company does not provide enough credit facility and might be losing on sales opportunity.

6. Average Number of days receivable outstanding

This ratio can be calculated as follows,

Avg No: of days = 365 / Receivable Turn over

Thus this gives the number days the receivables are out standing. If the ratio is expanded we can arrive at the following ratio,

Avg No: of days = (Average Receivables * 365)/Sales Revenue

This ratio gives an insight to the…

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Source by Sajith Samaraweera

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