Liquidity (short-term solvency)

Question 1

Current ratio

Answer 1

The current ratio is a liquidity ratio that measures a company’s ability to pay short-term and long-term obligations.

A good value for this ratio is generally considered to be 2: too low or too high values for this index are generally seen as symptoms of difficulties.

Current Ratio = Current Assets / Current Liabilities

Question 2

Quick ratio (acid test)

Answer 2

Quick ratio = (current assets – inventories) / current liabilities, or

= (cash and equivalents + marketable securities + accounts receivable) / current liabilities