Liquidity Flashcards
Liquidity tells us
How well a company is positioned to meet its short-term obligations
Current ratio tells us
The ability to pay off current liabilities within 1 year with its current assets
The higher the ratio, the better the liquidity position of a company
Current ratio formula
Current assets / current liabilities
Quick ratio used for
Industries in which net accounts receivable are relatively liquid, too much liquidity of inventories can be a problem
Only most liquid assets included, inventory excluded
Quick ratio formula
(Cash + marketable securities + net receivables) / current liabilities
Inventory is excluded
Days in accounts receivable tells us
How quickly AR is turned into cash
Days in AR formula
net AR / (net revenue * 365)
Average payment period tells us
How long an organization takes to pay its bills
Average payment period formula
current liabilities / ((operating expenses - depreciation expense) / 365)
AR to sales tells us
How much of a company’s sales occur on credit
Lot of sales on credit can cause short-term liquidity problems
AR to sales formula
(AR/sales)*100%
OR
((Trade & other receivables)/Net revenue) * 100%
