Liquidity

Ratios
Henryson Manuel
Shaira Ramirez
Liquidity Ratio
 Assesswhether a business has sufficient
cash or equivalents current assets to pay
currently maturing liabilities when it due.

 Liquidity
refers to the ability of the
company to convert non cash asset into
cash
Current Ratio/Working
Capital/Banker’s Ratio
 Currentratio identified how many times
that current liabilities could be paid with
the available current asset

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡
 Current Ratio=
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Example:
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡
 Current Ratio=
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

225000
 Current Ratio=
75000

=3

Current ratio= 3:1

Current Ratio
 Current ratio indicate that the firm has
enough to pay currently maturing
liabilities 3 times

 Currentliabilities may be settled by its

current asset
Acid test Ratio/Quick asset
ratio
 Ability
to pay current liabilities using
current asset without relying to the
inventory
 Acid test Ratio=
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡−𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦−𝑃𝑟𝑒𝑝𝑎𝑖𝑑 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

 Ratios
indicate that corporation has
enough liquid assets to pay its liability
Receivable Turnover

 Collectivity/efficiency of receivables
𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠
 Receivable turn over=
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
 Average Receivables=
𝑏𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑏𝑎𝑙𝑎𝑛𝑐𝑒−𝑒𝑛𝑑𝑖𝑛𝑔 𝑏𝑎𝑙𝑎𝑛𝑐𝑒
2
Average Age of Receivables
 Also called as days 'sale
 Indicates the average number of days
during which the company must wait
before receivables are collected
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑑𝑎𝑦𝑠𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟
 Days 'sale=
𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟
 Number of working days in a year= 360
days
Inventory turnover
 Measures the number of times that
inventory is replaced during the period
𝐶𝑂𝐺𝑆
 Inventory turnover=
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑀𝐼
𝑏𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑏𝑎𝑙𝑎𝑛𝑐𝑒−𝑒𝑛𝑑𝑖𝑛𝑔 𝑏𝑎𝑙𝑎𝑛𝑐𝑒
 Average MI=
2
Average Age of Inventory
 Measure average no. of days sell the
inventories
 Days of sale of
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑑𝑎𝑦𝑠𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟
inventory=
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟
Operating cycle
 Measure the number of days to convert
inventory into cash

 Operatingcycle=Age of inventory + Age

of receivable
Ratio of Current Asset to Total
Asset
 Measure over-all the liquidity of total asset
 it should be worthwhile to observe that
how much of that portion of total assets is
occupied by the current assets, as current
assets are essentially involved in forming
working capital and also take an active
part in increasing liquidity.
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡
 RCA-TA=
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡