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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.

8/17/2019 Module 3 Lecture 1 -- Liquidity Ratios.pdf

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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 company’s ability to meet its short-term obligations with its most liquid assets

Liquidity Ratios:

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Quick Ratio (Acid Test)

• Measures a company’s 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 company’s 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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