Liquidity Ratios - Ratio Analysis

It also identified as working capital ratios.  They show capability of the firm to meet its short term maturing financial obligation/recent liabilities as and whenever they fall due.

The ratios are concerned along with current liabilities and current assets.  They involve like:

a) Current ratio =  Current Assets/ Current liabilities

This ratio shows the No. of times the recent liabilities can be paid from recent assets before these assets are exhausted.

The main recommended ratio is 2.0 that is the recent asset should at least be twice as high as recent liabilities

b) Quick/acid test ratios = Current Asset - Stock/Current liabilities

Is an extra refined current ratio that exclude amount of stock of the firm. Stocks are excluded for two (2) basic purposes.

i) They are valued upon historical cost source

ii) They may not be changed into cash very fast

The ratio consequently shows the capability of the firm to pay its recent liabilities from the extra liquid assets of the firm.

c) Cash ratio = (Cash in hand/bank + short term marketable securities)/Current liabilities

This is a refinement of the acid analysis ratio indicating the capability of the firm to meet its recent liabilities from its mainly liquid resources.

Short term marketable securities refers to short term investment of the firm which can be converted into cash within a very short duration as commercial paper and treasury bills.

d) Net working capital Ratio = (Networking Capital x 100)/Net Assets

Whereas Net Assets or Capital employed = Total Assets - Current liability

This ratio shows the proportions of total net assets that are liquid enough to meet the recent liabilities of the firm. It is stated in % term.