Assessing Liquidity

Key indicators of Liquidity.

1. Current Ratio

• Indicates ability to meet short-term debt obligations.
• Indicates ability to pay current debts.
• Higher means more liquid.
• Total Current Assets (TCA) / Total Current Liabilities (TCL).
• If TCA > 2 x TCL, it shows good short-term financial strength.

2. Quick Ratio (also known as Acid Test Ratio)

• Most stringent measure of how well a company can cover short-term obligations.
• Indicates ability to convert current assets to cash for purpose of meeting current liabilities.
• TCA - Inventory / TCL