Week 4 Liquidity Ratios
Liquidity Ratios
As mentioned previously, these types of ratios indicate relatively how easily a firm can raise cash. For the purposes of this course we will discuss two liquidity ratios—the Current Ratio and the Quick Ratio (see below).
| Ratio | Formula |
| Current Ratio |
Current Assets Current Liabilities |
| For Amalgamated Hat Rack in 2016: |
1,795,000 1,016,000 |
= | 1.76 | |
|
Question: Is that good or bad? Answer: It depends, on business conditions, the situation, how other companies are doing, etc. (remember, all ratios are relative) |
| Quick (Acit Test) Ratio |
Current Assets - Inventory Current Liabilities |
| For Amalgamated Hat Rack in 2016: |
1,795,000 - 755,000 1,000,000 |
= | 1.04 | |
|
Again, you have to compare the result to other years and/or other companies in order to judge whether this is good or bad. Note: The Quick Ratio is kind of a worst case scenario for the current ratio. The quick ratio assumes that the firm’s inventory is valueless--that it can’t be sold for anything—so the firm can’t use it to generate cash. That’s why the ratio is sometimes called the acid test ratio. |
| Cash Ratio |
Cash + Marketable Secur. Current Liabilities |
| For Amalgamated Hat Rack in 2016: |
430,000 1,000,000 |
= | 0.43 |