Liquidity Ratio

There are several types of liquidity ratios commonly used by analysts and investors to assess a company's short-term financial health. Here are three of the most common ones:

Current Ratio (Liquidity Ratio):

• Formula: Current Assets / Current Liabilities
• Description: Measures the company's ability to pay off its short-term liabilities with its short-term assets. A ratio higher than 1 indicates the company has more current assets than liabilities.

Quick Ratio (Acid-Test Ratio):

• Formula: (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities
• Description: Similar to the current ratio, but excludes inventory from current assets. It provides a more stringent measure of liquidity because it excludes assets that may be less liquid or difficult to convert into cash quickly.

Cash Ratio:

• Formula: Cash and Cash Equivalents / Current Liabilities
• Description: Measures the company's ability to pay off its current liabilities with its cash and cash equivalents alone. This ratio provides the most conservative measure of liquidity.

Operating Cash Flow Ratio:

• Formula: Operating Cash Flow / Current Liabilities
• Description: Compares the company's operating cash flow to its current liabilities. It indicates how well operating cash flow covers short-term obligations, providing insight into the company's ability to generate cash from its core business activities.

Net Working Capital Ratio:

• Formula: (Current Assets - Current Liabilities) / Total Assets
• Description: Measures the proportion of total assets financed by net working capital (current assets minus current liabilities). A higher ratio suggests a larger portion of total assets is financed by short-term sources, which could indicate higher liquidity risk.

Defensive Interval Ratio:

• Formula: (Cash + Marketable Securities + Receivables) / Daily Operating Expenses
• Description: Estimates how long a company can operate using its liquid assets without any additional cash inflows. It provides a measure of the company's ability to weather short-term financial difficulties.

Liquidity ratios offer a more comprehensive view of a company's liquidity position, taking into account various factors such as cash flow, working capital efficiency, and the ability to cover operating expenses. Depending on the specific circumstances and goals of the analysis, different ratios may be more relevant or informative.

Hope this helps

Team Tradebeez