Liquidity ratios Flashcards
What do liquidity ratios measure?
The company’s ability to meet obligations as they become due
What are the main liquidity ratios?
- Current ratio
- Acid test ratio AKA quick ratio
- Cash from operations to maturing obligations
- Operating cash cycle
What is the formula for current ratio?
current assets / current liabilities
What does a current ratio under 1 suggest?
The company may not have the current assets to meet its current liabilities
What sort of companies normally have low current ratios?
Companies with very short operating cash cycles e.g. supermarkets
What is the formula for acid test ratio?
(current assets - inventory) / current liabilities
What is another name for acid test ratio?
Quick ratio
What is the formula for cash generated from operations to maturing obligations?
operating cash inflow / current liabilities
If cash generated from operations to maturing obligations is under 1, what does that suggest?
The company may have to generate cash inflow from financing or investing activities
What is another name for operating cash cycle?
Cash conversion cycle
What does operating cash cycle measure?
Time between cash paid to suppliers and cash received from customers
What is the formula for operating cash cycle?
(inventory days - trade payable days) + trade receivable days
What type of ratios make up the calculation for operating cash cycle?
Working capital efficiency ratios
What does a negative operating cash cycle indicate?
Cash is collected from customers before being paid to suppliers
