1. Liquidity Measurement Ratios: Introduction
  2. Liquidity Measurement Ratios: Current Ratio
  3. Liquidity Measurement Ratios: Quick Ratio
  4. Liquidity Measurement Ratios: Cash Ratio
  5. Liquidity Measurement Ratios: Cash Conversion Cycle

A company’s liquidity is its ability to meet its short-term financial obligations. Liquidity ratios attempt to measure a company's ability to pay off its short-term debt obligations. This is done by comparing a company's most liquid assets, those that can be easily converted to cash, with its short-term liabilities.

In general, the greater the level of coverage of liquid assets to short-term liabilities the better. 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 its short-term financial obligations, and consequently in running its day-to-day operations.

During hard times for the business or the economy, a company with insufficient liquidity might be forced to make tough choices to meet their obligations. These could include liquidating productive assets, selling inventory or even a business unit. These moves could prove detrimental to both the company’s short-term viability and their long-term financial health.

[ Liquidity ratios are a key part of fundamental analysis since they help determine a company's ability to service its debts. If a company fails to pay its debts, it could face bankruptcy or restructuring activity that could be detrimental to shareholder value. Investopedia's Fundamental Analysis Course discusses liquidity ratios and other financial ratios, along with financial statements and actionable fundamental strategies used by financial professionals in over five hours of on-demand video, exercises, and interactive content. ]

Liquidity ratios are based on different portions of the company’s current assets and current liabilities taken from the firm’s balance sheet.

We will look at the current ratio, quick ratios, the cash ratio and the cash conversion cycle as key measurements of a company’s liquidity.

 


Liquidity Measurement Ratios: Current Ratio
Related Articles
  1. Investing

    6 Basic Financial Ratios And What They Reveal

    These formulas can help you pick better stocks for your portfolio once you learn how to use them.
  2. Investing

    Key Financial Ratios to Analyze Tech Companies

    Understand the technology industry and the companies that operate in it. Learn about the key financial ratios used to analyze tech companies.
  3. Investing

    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.
  4. Investing

    Sysco and Other Big Movers In Services

    The market has been slipping so far today. The Nasdaq has fallen 0.3%; the S&P 500 has fallen 0.4%; and the Dow has declined 0.5%. The Services sector (IYC) is currently lagging behind the overall ...
  5. Investing

    5 must-have metrics for value investors

    In this article, we outline the five ratios that can help value investors find the most undervalued stocks in the market.
  6. Investing

    SXC Health Solutions Corp. (USA) Among the Nasdaq's Biggest Movers

    The market is having a bad day so far: the Nasdaq is trading down 0.3%; the S&P 500 has declined 0.4%; and the Dow has slipped 0.5%. The Nasdaq Composite Index is a capitalization-weighted index, ...
  7. Investing

    Measuring Company Efficiency To Maximize Profits

    Efficiency ratios can provide indications of profitability, shows how efficiently a company is being managed, utilizes its assets and handles liabilities.
Trading Center