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Analyzing Financial Statements > Liquidity Ratios
Liquidity Ratios
• Current Ratio
• Quick Ratio (Acid-Test Ratio)
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Analyzing Financial Statements > Liquidity Ratios
Current Ratio
• The liquidity ratio expresses a company's ability to repay short-term creditors out
of its total cash. The liquidity ratio is the result of dividing the total cash by shortterm borrowings.
• The current ratio is a financial ratio that measures whether or not a firm has
enough resources to pay its debts over the next 12 months.
• Current ratio = current assets / current liabilities.
• Acceptable current ratios vary from industry to industry and are generally between
1.5 and 3 for healthy businesses.
Liquidity
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Analyzing Financial Statements > Liquidity Ratios
Quick Ratio (Acid-Test Ratio)
• Quick Ratio = (Cash and cash equivalent + Marketable securities + Accounts
receivable) / Current liabilities.
• Acid Test Ratio = (Current assets - Inventory) / Current liabilities.
• Ideally, the acid test ratio should be 1:1 or higher, however this varies widely by
industry. In general, the higher the ratio, the greater the company's liquidity.
Cash
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Appendix
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Analyzing Financial Statements
Key terms
• current ratio current assets divided by current liabilities
• Treasury bills Treasury bills (or T-Bills) mature in one year or less. Like zero-coupon bonds, they do not pay interest prior to
maturity; instead they are sold at a discount of the par value to create a positive yield to maturity.
• working capital management Decisions relating to working capital and short term financing are referred to as working capital
management [19]. These involve managing the relationship between a firm's short-term assets and its short-term liabilities.
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Analyzing Financial Statements
Cash
Cash is the most liquid asset in a business.
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Analyzing Financial Statements
Liquidity
High liquidity means a company has the ability to meet its short-term obligations.
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Analyzing Financial Statements
A company has $100,000 in cash, $300,000 in accounts
receivable, $50,000 in inventory and a $300,000 office building.Its
current liabilities are $250,000.What is the company's current
ratio, and does that ratio good short-term financial strength?
A) The current ratio is 1.8, and the ratio indicates poor short-term
financial strength.
B) The current ratio is 3, and the ratio indicates good short-term financial
strength.
C) The current ratio is 3, and the ratio indicates good short-term financial
strength.
D) The current ratio is 1.8, and the ratio indicates good short-term
financial strength.
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Analyzing Financial Statements
A company has $100,000 in cash, $300,000 in accounts
receivable, $50,000 in inventory and a $300,000 office building.Its
current liabilities are $250,000.What is the company's current
ratio, and does that ratio good short-term financial strength?
A) The current ratio is 1.8, and the ratio indicates poor short-term
financial strength.
B) The current ratio is 3, and the ratio indicates good short-term financial
strength.
C) The current ratio is 3, and the ratio indicates good short-term financial
strength.
D) The current ratio is 1.8, and the ratio indicates good short-term
financial strength.
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Analyzing Financial Statements
A company has $450,000 in cash, $300,000 in marketable
securities and $500,000 worth of inventory. Its current assets are
worth $_______,750,000 and its current liabilities are
$_______,250,000. What is the company's acid test ratio?
A) 1.04
B) 1.16
C) 0.80
D) 1
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Analyzing Financial Statements
A company has $450,000 in cash, $300,000 in marketable
securities and $500,000 worth of inventory. Its current assets are
worth $_______,750,000 and its current liabilities are
$_______,250,000. What is the company's acid test ratio?
A) 1.04
B) 1.16
C) 0.80
D) 1
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Analyzing Financial Statements
Attribution
• Wikipedia. "Quick ratio." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Quick_ratio
• Wikipedia. "Cash and cash equivalents." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Cash_and_cash_equivalents
• Wikipedia. "Treasury bills." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Treasury%20bills
• Wikipedia. "working capital management." CC BY-SA 3.0 http://en.wikipedia.org/wiki/working%2520capital%2520management
• Wikipedia. "Current ratio." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Current_ratio
• Wikipedia. "Liquidity ratio." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Liquidity_ratio
• Wikipedia. "Current liabilities." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Current_liabilities
• Wikipedia. "Current asset." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Current_asset
• Wikipedia. "Financial ratio." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Financial_ratio
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