Friday, November 28, 2014

Liquidity ratios

As I mentioned before, liquidity ratios measure your company’s ability to meet its short-term financial obligations. The key ratios in this category are current ratio, quick ratio, absolute liquid ratio and current cash debt coverage ratio.

Unfortunately, liquidity ratios are not true measure of liquidity because they tell about the quantity but nothing about the quality of the current assets (i.e., how liquid these assets really are). And, therefore, should be used carefully.


For a useful analysis of liquidity, these ratios are used in conjunction with efficiency ratios such as receivables turnover ratio, accounts payable turnover ratio and inventory turnover ratio etc. And, obviously, supported by in-depth evaluation of actual liquidity of assets used in computing liquidity ratios. 

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