Liquidity Ratios Flashcards
What does a company need to have to be liquid?
A company must have more current assets than current liabilities to be liquid.
What is the difference between liquidity and solvency?
Liquidity focuses more on current financial accounts while solvency focuses on total financial accounts (current and non-current).
What is the Current Ratio?
Measures a company’s ability to pay short-term and obligations with current assets.
What is the ideal current ratio?
Greater than 1, so that a company can meet all its obligations at once but less than 3.
If greater than 3, the company is not using its current assets efficiently.
What is Quick Ratio?
A company’s ability to meet its short term obligations with its most liquid assets (usually cash).
What is the ideal quick ratio?
Want it to be higher than 1, the higher the better.
Ex. 1.5, a company has $1.50 in liquid assets available to cover each dollar of its current liabilities.
