A:

A company’s liquidity ratio is a measurement of its ability to pay off all of its debts with its current assets. The ratio is calculated by taking the difference between liabilities and conditional reserves and using that figure to divide the company's total assets. The liquidity ratio is a valuable metric for market analysts and potential investors in helping determine if a company is stable and financially healthy enough to pay off the debts and outstanding liabilities it has incurred. A low liquidity ratio could signal the company is suffering financial trouble. However, a very high liquidity ratio isn't necessarily a good thing either; it may be an indication that the company is too focused on liquidity to the detriment of efficiently utilizing capital to grow and expand its business.

Two commonly reviewed liquidity ratios are the current ratio and the quick ratio. The current ratio examines the percentage of currently available assets a company has to meet its liabilities and provides a good indication of a company's ability to cover its short-term liabilities. It's a measure of cash on hand that a company has to settle expenses and short-term obligations. One way to improve its current ratio is by using sweep accounts that transfer funds into higher interest rate accounts when they're not needed and back to readily accessible accounts when necessary. Paying off liabilities also improves current ratio.

Another popular liquidity ratio is the quick ratio. This tool refines the current ratio, measuring the amount of the most liquid assets a company has to cover liabilities. The quick ratio excludes inventory and some other current assets from the calculation and is a more conservative measurement than the current ratio. The quick ratio can be improved using some of the same methods that improve the current ratio. Additional means of improving the quick ratio include using long-term financing rather than cash on hand to acquire inventory or selling unnecessary assets.

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