Liquidity Ratios – Meaning, Formula, Calculation & Interpretations [Video]

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/liquidity/

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