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

post closing trial balance should only containgrowing annuity present valuesum of digits formuladebtor turnover days formulatotal fixed cost formula accountingannuity pv formulabank account ledger templatecash disbursements journalnon profit chart of accounts sampleconsumable assetswhat is an nsf checkperpetual and periodic inventory system journal entriesdays sales in inventory ratio formulaexample of statement of retained earningswhat are temporary accounts in accountingbalance sheet debtorsproveit com excel testjournal and ledger examplespresent value of annuity due tablegeneral ledger for dummiesdepreciation charges on fixed assetspurchases returns and allowancesgrowing annuity ba ii plusannuity due tablehow to calculate raw materials inventoryifrs deferred revenuedefine amortisejournal entry for unrealized gain on trading securitiescalculate dividends declaredaccounting entries for finance leaserules of bookkeepingaccounts payable reconciliation exampleaccounting concepts and principlescalculate accounts receivable turnoverfifo perpetual inventorypmt formula in excelwhat is outstanding check in bank reconciliationcalculate notes payablecash conversion cycle diagramaccounting debits and credits chartaverage days sales in inventorycalculate dividends declaredamortization straight line methodprepaid expenses examplesaccounts receivable accounting entriesdefine amortization expensesample money receipt formatgeneral ledger excelpurchase to sales ratio formulaadjusting entry for accrued revenuecontinuous compound interest formula calculatorreplenish petty cashliquidity quick ratioaccrual spreadsheetjournal entries in tally4 stages of accounting cyclecompute the manufacturing overhead rate for the yearsample of a general ledgerfv annuity due formulasegregation of duties accounts payableaccounting fifo methodaccounting irrexpenses template small businessmultiple step income statementthe expanded accounting equationcurrent ratio versus quick ratiocredit entry to accounts receivabletotal debt to equity ratio interpretationoverstated accountingcogs formula income statementcredit debit cheat sheetcalculate mortgage constantfixed asset schedule templatecash flow coverage ratio exampleannuity tablessupplies expense journal entryhow to calculate net realizable valueformula markupaccrual based accounting exampletrade payables payment periodgross margin calculator excel