Question: What Is Liquidity Ratio With Example?

What do you mean by liquidity ratio?

Liquidity ratios are an important class of financial metrics used to determine a debtor’s ability to pay off current debt obligations without raising external capital.

Common liquidity ratios include the quick ratio, current ratio, and days sales outstanding..

What are the 3 liquidity ratios?

A liquidity ratio is used to determine a company’s ability to pay its short-term debt obligations. The three main liquidity ratios are the current ratio, quick ratio, and cash ratio.

What are liquids give two examples?

Examples of liquids include:Blood.Honey.Wine.Water.Mercury (a liquid metal)Oil.Milk.Acetone.More items…•

What is a bad liquidity ratio?

A low liquidity ratio means a firm may struggle to pay short-term obligations. … For a healthy business, a current ratio will generally fall between 1.5 and 3. If current liabilities exceed current assets (i.e., the current ratio is below 1), then the company may have problems meeting its short-term obligations.

Is Roa a liquidity ratio?

A high ROA indicates that management is effectively utilizing the company’s assets to generate profit. The quick ratio measures the liquidity of a company. The higher this ratio, the more liquid assets a company has to meet immediate financial obligations. The current ratio is another measure of liquidity.

What are some examples of liquidity?

The following are common examples of liquidity.Cash. Cash of a major currency is considered completely liquid.Restricted Cash. Legally restricted cash deposits such as compensating balances against loans are considered illiquid.Marketable Securities. … Cash Equivalents. … Credit. … Assets.

How is liquidity ratio calculated?

Formula:Quick ratio = (marketable securities + available cash and/or equivalent of cash + accounts receivable) / current liabilities.Quick ratio = (current assets – inventory) / current liabilities.

What is good liquidity ratio?

A good liquidity ratio is anything greater than 1. It indicates that the company is in good financial health and is less likely to face financial hardships. The higher ratio, the higher is the safety margin that the business possesses to meet its current liabilities.

What is liquidity and why is it important?

Liquidity is the ability to convert an asset into cash easily and without losing money against the market price. … Liquidity is important for learning how easily a company can pay off it’s short term liabilities and debts.

What is a common measure of liquidity?

The most common measures of liquidity are: Current Ratio. … Quick RatioQuick RatioThe Quick Ratio, also known as the Acid-test, measures the ability of a business to pay its short-term liabilities with assets readily convertible into cash – The ratio of only the most liquid assets (cash, accounts receivable, etc.)

What is another word for liquidity?

In this page you can discover 6 synonyms, antonyms, idiomatic expressions, and related words for liquidity, like: fluidity, fluidness, liquidness, runniness, liquid and liquid state.

What are the four liquidity ratios?

4 Common Liquidity Ratios in AccountingCurrent Ratio. One of the few liquidity ratios is what’s known as the current ratio. … Acid-Test Ratio. The Acid-Test Ratio determines how capable a company is of paying off its short-term liabilities with assets easily convertible to cash. … Cash Ratio. … Operating Cash Flow Ratio.