3⃣ Liquidity Ratio every investor should know:
• Current Ratio
• Quick Ratio
• Cash Ratio
Let’s understand each one of them🧵⤵️
#StockMarketindia #investing
• Current Ratio
• Quick Ratio
• Cash Ratio
Let’s understand each one of them🧵⤵️
#StockMarketindia #investing
What is the Liquidity Ratio?🧐
It is one of the most imp factors to keep in mind before investing. It is used to infer a borrower’s current debt-repaying capacity or proficiency.
It is one of the most imp factors to keep in mind before investing. It is used to infer a borrower’s current debt-repaying capacity or proficiency.
• Current Ratio
This ratio measures the ability of the enterprise to pay its short-term financial obligations. This ratio shows the short-term financial health of the enterprise.
Its formula is:
Current Ratio = Current Asset(CA)/Current Liabilities(CL)
This ratio measures the ability of the enterprise to pay its short-term financial obligations. This ratio shows the short-term financial health of the enterprise.
Its formula is:
Current Ratio = Current Asset(CA)/Current Liabilities(CL)
Here⬆️CA includes cash, stock, receivable, prepaid exp, deposits etc & CL includes short-term loans, payroll liabilities, outstanding exp, creditors etc. The Ideal ratio is 2:1
• Quick Ratio
Also known as Liquid Ratio, determines the company’s current available liquidity. It shows the relationship between a company’s liquid assets with its liabilities. The ideal quick ratio is 1:1
Its formula is:
Quick Ratio = Liquid Assets/Current Liabilities.
Also known as Liquid Ratio, determines the company’s current available liquidity. It shows the relationship between a company’s liquid assets with its liabilities. The ideal quick ratio is 1:1
Its formula is:
Quick Ratio = Liquid Assets/Current Liabilities.
Liquid assets are those assets that can easily be converted into cash in a very short period of time. Liquid assets include assets like cash, money market instruments, and marketable securities.
Liquid Asset = Current asset - Inventories - Prepaid exp
Liquid Asset = Current asset - Inventories - Prepaid exp
• Cash Ratio
It is a liquidity metric that shows company’s capacity to pay off short-term obligations with its cash & cash equivalents. Compared to other liquidity ratios, this ratio is much stricter becoz only cash & cash equivalents are used in the calculation.
It is a liquidity metric that shows company’s capacity to pay off short-term obligations with its cash & cash equivalents. Compared to other liquidity ratios, this ratio is much stricter becoz only cash & cash equivalents are used in the calculation.
Cash Ratio = Cash & Cash Equivalent/Current Liabilities
A business should strive cash ratio of 0.5 or above
A business should strive cash ratio of 0.5 or above
Why Liquidity Ratios are imp?
1. Helps in understanding the cash richness of the company. A higher liquidity ratio indicates stability whereas a poor liquidity ratio holds up the risk of monetary damages.
1. Helps in understanding the cash richness of the company. A higher liquidity ratio indicates stability whereas a poor liquidity ratio holds up the risk of monetary damages.
2. Gives u an idea of the operating system of company. This shows how effectively & efficiently the company sells its product or services to its customers. A company can plan to improve its production system, plan generous inventory storage to avoid any loss.
3. Management plays a crucial role everywhere. A company can optimize its management efficiency while following the demand of potential creditors.
What are the limitations?
1. While calculating liquid ratios, the amt of current assets is considered. Hence, it is advised to take other accounting metrics along with liquidy ratios while analysing the company’s liquidity.
1. While calculating liquid ratios, the amt of current assets is considered. Hence, it is advised to take other accounting metrics along with liquidy ratios while analysing the company’s liquidity.
2. The liquidity ratio also takes into account inventory to calculate the company’s liquidity. However, this could result in miscalculation due to overestimation in some areas.
Loading suggestions...