Liquidity ratio analysis provides us with an understanding that whether the company will be able to serve its short-term liabilities (current liabilities) with the help of its short-term assets (current assets). This helps an analyst understand whether the company has enough cash in the system to survive for atleast one operating cycle. Liquidity Ratios types include current ratios, quick ratio, cash ratio, defensive interval ratio and working capital ratio.
Cash ratio is the most common type of liquidity ratio that measures the liquidity of the company and considers only the Cash and Cash Equivalents.
Quick ratio is a liquidity ratio which is used as a measure of the ability of the company to meet its current obligation.
Quick Ratio formula is a more stringent measure of short-term liquidity as compared to Current Ratio.
The current ratio is a type of liquidity ratio that measures current assets relative to current liabilities thereby helping the investor to know how liquid a firm is.
The current ratio is calculated because the investor wants to know how liquid a firm is.
Defensive Interval Ratio is used in judging the liquidity of the company.
Working Capital Ratio is used to measure a company’s financial health.
Working capital formula (WC) is one of the most common concepts every business owner should understand. To find out how liquid a firm is at any given moment of time.
Net working capital (NWC) determines the short terms liquidity of a company.
Current Ratio and Quick ratio are liquidity ratio formulas and are extremely helpful to Financial Statement Analysis.
Bid Ask formula is used to find out the difference between the price the sellers ask and the price the buyers bid for.
Liquidity can be defined as a firm’s ability to meet the current liabilities of the current assets it has. Solvency, on the other hand, can be defined as the ability of the company to run its operations in the long run.
Liquidity analysis is the ability of the firm to pay off the current liabilities with the current assets it possesses.
Solvency is the ability of the firm to continue its operations for a long period of time.
The term ‘Liquidity Risk’ means ‘Cash Crunch’ for a temporary or short-term period.