Friday, November 07, 2008

More liquidity ratios

Liquidity can be checked with a few more ratios :

Quick ratio / Acid test ratio takes only the most liquid current assets ( cash + A/c receivable), but not inventory and other less liquid current assets.

Quick ratio = Liquid current assets / current liabilities

Tells if a company has enough cash to meet liabilities

If current ratio is significantly higher than Quick ratio it means the company has a lot of low liquid assets.

Cash ratio further refines quick ratio and takes only cash ( not a/c receivable or inventory).

Cash ratio = cash under control / current liabilities

High cash ratio need not be good as it is not productive for a company to hold large cash reserves.



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