

By Richard Loth (Contact  Biography)
The first ratios we'll take a look at in this tutorial are the liquidity ratios. Liquidity ratios attempt to measure a company's ability to pay off its shortterm debt obligations. This is done by comparing a company's most liquid assets (or, those that can be easily converted to cash), its shortterm liabilities.
In general, the greater the coverage of liquid assets to shortterm liabilities the better as it is a clear signal that a company can pay its debts that are coming due in the near future and still fund its ongoing operations. On the other hand, a company with a low coverage rate should raise a red flag for investors as it may be a sign that the company will have difficulty meeting running its operations, as well as meeting its obligations.
The biggest difference between each ratio is the type of assets used in the calculation. While each ratio includes current assets, the more conservative ratios will exclude some current assets as they aren't as easily converted to cash.
The ratios that we'll look at are the current, quick and cash ratios and we will also go over the cash conversion cycle, which goes into how the company turns its inventory into cash.
To find the data used in the examples in this section, please see the Securities and Exchange Commission's website to view the 2005 Annual Statement of Zimmer Holdings.

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The Working Capital Position
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Do Your Investments Have ShortTerm Health?
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Current Liabilities
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What is the Cash Ratio?
The cash ratio is the ratio of a company's total cash and cash equivalents to its current liabilities. 
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Dynamic Current Ratio: What It Is And How To Use It
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Financial Analysis: Solvency Vs. Liquidity Ratios
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5 Basic Financial Ratios And What They Reveal
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What Are Quick Assets?
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Understanding Financial Liquidity
Understanding how this measure works in the market can help keep your finances afloat. 
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Financial Ratios to Spot Companies Headed for Bankruptcy
Obtain information about specific financial ratios investors should monitor to get early warnings about companies potentially headed for bankruptcy.