liquidity ratios

Question 1

what is the current ratio formula and what does it show?

Answer 1

Current Ratio = Current Assets / Current Liabilities
Evaluates the ability of a company to pay short-term obligations using current assets (cash, marketable securities, current receivables, inventory, and prepayments).

Question 2

what is the acid test ratio formula and what does it show?

Answer 2

Acid Test Ratio = Current Assets - Stock / Current Liabilities
Also known as “quick ratio”, it measures the ability of a company to pay short-term obligations using the more liquid types of current assets or “current assets” (cash, marketable securities, and current receivables).

Question 3

what is the cash ratio formula and what does it show?

Answer 3

Cash Ratio = ( Cash + Marketable Securities ) / Current Liabilities
Measures the ability of a company to pay its current liabilities using cash/equivalents and marketable securities. Marketable securities are short-term debt instruments that are as good as cash.