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Liquidity ratio

Accounting concept

Summary

Accounting concept

In accounting, the liquidity ratio expresses a company's ability to repay short-term creditors out of its total cash. It is the result of dividing the total cash by short-term borrowings. It shows the number of times short-term liabilities are covered by cash. If the ratio is greater than 1.0, it means fully covered.

The formula is:

Variants

Liquidity ratios measure how quickly assets can be turned into cash in order to pay the company's short-term obligations. The following metrics can also be considered to measure the liquidity of a firm.

  • Current ratio measures whether a firm has enough resources to meet its short-term obligations. It is the ratio of a firm's current assets to its current liabilities.
  • Quick ratio (also known as an acid test) measures the ability of a company to use near-cash ("quick") assets to eliminate current liabilities immediately.
  • Reserve requirement, a bank regulation that sets the minimum reserves each bank must hold.
  • Working capital, a financial metric that represents operating liquidity available.
  • Crisis liquidity ratio. A number of Bulgarian academic and accounting publications discuss the "crisis liquidity ratio" (CLR), defined as:

: :and recommend its use under stressed conditions, as receivables may be less reliably realizable during crises. Several authors present CLR as a conservative variant of short-term liquidity assessment for stress scenarios, excluding receivables due to heightened collectability risk.

References

Wikipedia Source

This article was imported from Wikipedia and is available under the Creative Commons Attribution-ShareAlike 4.0 License. Content has been adapted to SurfDoc format. Original contributors can be found on the article history page.

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