Financial ratios offer entrepreneurs a way to evaluate their company's performance and
compare it other similar businesses in their industry. Ratios measure the relationship
between two or more components of financial statements. They are used most
effectively when results over several periods are compared.
1. Liquidity Ratios
2. Leverage Ratios
3. Efficiency Ratios
4. Profitability Ratios
5. Market Value Ratios
 Liquidity ratios are a measure of the ability of a company to pay off its short-term
liabilities. Liquidity ratios determine how quickly a company can convert the assets and
use them for meeting the dues that arise. The higher the ratio, the easier is the ability to
clear the debts and avoid defaulting on payments.
 The importance of it is that Your liquidity ratio tells you whether you have the ability to
meet your upcoming liabilities. Typically, this means you have sufficient cash, bank
deposits or assets that can quickly be converted to cash to pay your bills. If you don't,
your business could hit difficulties and could even be forced to cease trading
1.
Current Ratio
2.
Quick Ratio
3.
Cash Ratio
 Current Ratio = Current Assets / Current Liabilities
 The current ratio is the simplest liquidity ratio to calculate and interpret. Anyone can easily find
the current assets and current liabilities line items on a company’s balance sheet. Divide current assets
by current liabilities, and you will arrive at the current ratio.
Interpretation:
If Current Assets > Current Liabilities, then Ratio is greater than 1.0 -> a desirable
situation to be in. If Current Assets = Current Liabilities, then Ratio is equal to 1.0 ->
Current Assets are just enough to pay down the short term obligations.
 If Dodong’s Company has P220,000 total current assets and P70,000 total current
liabilities. What is the Current ratio? And what does the current ratio concludes?
Current Ratio Formula:
Current Ratio = Current Assets / Current Liabilities
Current Ratio = P220,000 / P70,000
Current Ratio = 3.14
Conclusion: Therefore, it clearly shows that Dodong’s company has more than
enough capability to pay its short term obligations or pay its current liabilities.
 The quick ratio is calculated by dividing a company's more liquid assets like cash,
cash equivalents, marketable securities, and accounts receivables by total
current liabilities.
 The quick ratio is an indicator of a company's short-term liquidity position and
measures a company's ability to meet its short-term obligations with its more
liquid assets.
Interpretation:
A quick ratio of 1 or above indicates that the company has sufficient liquid assets
to satisfy its short-term obligations. An extremely high quick ratio, on the other hand,
isn't always a good sign. This is because a very high ratio could indicate that the
company is resting on a significant amount of cash.
 If Dodong’s Company has P70,000 cash and cash equivalents, P30,000 A/R and
P70,000 total current liabilities. What is its Quick ratio? And what does quick ratio
result concludes?
Quick Ratio Formula:
Quick Ratio = (More Liquid Assets such as Cash, A/R, Marketable Securities) /
Current Liabilities
Quick Ratio = P100,000 / P70,000
Quick Ratio = 1.43
Conclusion: Therefore, it clearly shows that Dodong’s company has sufficient more
liquid assets to satisfy its short term obligations.
 The cash ratio is a measurement of a company's liquidity. It specifically calculates
the ratio of a company's total cash and cash equivalents to its current liabilities.
 If the company is forced to pay all current liabilities immediately, this metric shows
the company's ability to do so without having to sell or liquidate other assets.
 Interpretation:
In general, a cash ratio equal to or greater than 1 indicates a company has
enough cash and cash equivalents to entirely pay off all short-term debts. A ratio
above 1 is generally favored, while a ratio under 0.5 is considered risky as the entity
has twice as much short-term debt compared to cash.
 If Dodong’s Company has P70,000 cash and cash equivalents and P70,000 total
current liabilities. What is its Cash ratio? And what does Cash ratio result
concludes?
Cash Ratio Formula:
Cash Ratio = Cash and Cash equivalents / Current Liabilities
Cash Ratio = P70,000 / P70,000
Cash Ratio = 1
Conclusion: Therefore, it is giving us the information that Dodong’s Company has
enough cash and cash equivalents to pay its Short term debts.