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Business Tools for Career Readiness

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Finance for

Non-Financial Professionals

Module 3

with David Standen, D.B.A.

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Liquidity Ratios

A class of financial metrics

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Liquidity Ratios

A class of financial metrics

Used to determine a company's ability topay off its short-term debt obligations

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Liquidity Ratios

A class of financial metrics

Used to determine a company's ability topay off its short-term debt obligations

The higher the value of the ratio, the largerthe margin of safety that the companypossesses to cover short-term debts

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Liquidity Ratios:

Working Capital Ratio

Indicates whether a company has enough shortterm assets to cover its short term debt.

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Liquidity Ratios:

Working Capital Ratio

Indicates whether a company has enough shortterm assets to cover its short term debt.

Working Capital Ratio =Current Assets / Current Liabil ities

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Liquidity Ratios:

Working Capital Ratio

Indicates whether a company has enough shortterm assets to cover its short term debt.

o Anything below 1 indicates negative W/C

o Anything over 2 means the company is not

investing excess assets

o Most believe a ratio between 1.2 and 2.0 is

sufficient

Working Capital Ratio =Current Assets / Current Liabil ities

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Quick Ratio (Acid Test)

Measures a companys ability to meet its short-term obligations with its most liquid assets

Liquidity Ratios:

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Quick Ratio (Acid Test)

Measures a companys ability to meet its short-term obligations with its most liquid assets.

Liquidity Ratios:

Quick Ratio =(current assets inventories) / current liabil ities

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Quick Ratio (Acid Test)

Measures a companys ability to meet its short-term obligations with its most liquid assets

Excludes inventories from current assets

Measures the dollar amount of liquid assets available for

each dollar of current liabilities

The higher the quick ratio, the better the company's

liquidity position

Liquidity Ratios:

Quick Ratio =(current assets inventories) / current liabil ities

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