Liquidity Ratio (Current Ratio/Quick Ratio)
Indicators of a firm’s ability to meet short-term obligations.
Detailed Description
Liquidity Ratio (Current Ratio/Quick Ratio)
What is the purpose of liquidity ratios?
Liquidity ratios assess a company's ability to meet short-term obligations with its most liquid assets.
What are the two primary liquidity ratios?
The two primary liquidity ratios are the Current Ratio and the Quick Ratio.
How is the Quick Ratio calculated?
The Quick Ratio is calculated as (Current Assets - Inventories) / Current Liabilities.
What does a Current Ratio above 1 indicate?
A Current Ratio above 1 indicates that a company has more current assets than current liabilities, suggesting a favorable liquidity position.
Why is the Quick Ratio considered more conservative than the Current Ratio?
The Quick Ratio is more conservative because it excludes inventory from current assets, focusing on cash and receivables that can be quickly converted to cash.