Liquidity Ratios

Liquidity Ratios answer the question: "How well can the firm pay its liabilities that are coming due?"  They measure the ability of a firm to meet Short-term financial obligations.

Current Ratio (Working Capital Ratio): Compares Current Assets to Current Liabilities.

Acid-Test Ratio (Quick Ratio): Compares the ‘most liquid’ Current Assets to Current Liabilities.  The most liquid assets are Cash, Receivables and Short-term Investments.

Cash Ratio: Compares Cash to Current Liabilities. This is a “conservative” ratio because it counts only cash as liquid.

 

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