What is a Liquidity Ratio?

Liquidity Ratio Definition

A liquidity ratio is used to measure the ability of a business to generate cash to meet its short term liabilities and debts.

Liquidity ratios are normally based on balance sheet items and indicate the number of times the liquid assets of a business cover the short term liabilities.

Popular Liquidity Ratios List

A selection of popular liquidity ratios from the mdct.ru Ratios Guide.

Liquidity Ratio Analysis

A Liquidity ratio should not be viewed in isolation but looked at over a period of time using trend analysis and in comparison to other businesses in your industry.

In addition, in order to give a full picture of what is happening, they should be viewed relative to other ratios calculated for the business such as profitability ratios, efficiency ratios, leverage ratios, activity ratios, and investor ratios.

The higher the ratio the more liquidity the business has and the less risky it is seen to be. However, a balance needs to be met as a ratio which is too high implies a lot of money tied up in current assets. It is generally accepted that money tied up in this way earns very little or nothing for the business and is not acceptable.

Liquidity Ratio Formula

There are numerous examples of liquidity ratios, however, it is important to select the key ratios which relate to your business. The industry sector, size, and complexity of the business will determine the most appropriate ratios to use and many may not be relevant or worth calculating, particularly for a small business.

List of Useful Liquidity Ratios Formula
Liquidity Ratio Formula
Current Ratio Current Assets / Current Liabilities
Quick Ratio (Current Assets – Inventory) / Current Liabilities
What is a Liquidity Ratio? December 7th, 2016Team

You May Also Like

Related pages

accounting spreadsheet templates for small businessdupont analysis equationallowance for doubtful debts in balance sheetwhat is cash float in accountingsum of the years digits depreciation formulajournal entries for accounts payablegeneral ledger knowledge testaccounts receivable days ratiobad debt write off journal entryjournal entry for insurance premiumstraight line depreciation book valueexpense template for small businessconsignment stock procedurestraight line depreciation calculator excelexcel pmttotal gearing ratio formulacash payment voucher formatadjusting entry for suppliesreceivables turnover exampledebtor ledgerperpetuity ratewhat are consumable storescalculating ratios in excelcash book reconciliation examplesteps in accounting cyclehow do i calculate npv in excelnotes on consignment accountingbreak even lease payment formuladividend declaration templateequity multiplier analysisquick ratio formula calculatorimprest system definitioncalculating face value of a bondexcel profit margin formuladefine contrasaccrual accounting vs cashtable of present value annuity factorsnpv excelretained earning accountinghow to compute gross profitloss on disposal of fixed assetspartnership accounting basicsstraight line method for calculating depreciationjournal entry for dividend incomenet income sales ratiocreditor ledgerirr function excelbad debts accounting entrytrial balance worksheetquick assets ratio formulatrial balance template exceldoubtful accounts ratioadjusting entries prepaid insuranceapic common stockthe double declining balance methodallowance for uncollectible accountsdouble entry bookkeeping coursewrite off accounts receivable journal entrygenerally accepted accounting principles concepts and conventionscompute inventory turnovera journal entry recording an accrualaccruals and prepayments t accountsrestaurant accounting templatesample of petty cash vouchercommon size balance sheet exampleinventory days calculation formulahow to calculate a markupcalculate effective annual interest rateperpetual system inventorycash receipts accounting definitionaccount receivable aging6 column worksheet accountingbookkeeping on excelinterest accrued on notes payablecash receipts and cash disbursements