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Liquidity Ratio Formula:
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The Liquidity Ratio, also known as the Current Ratio, measures a company's ability to pay off its short-term liabilities with its short-term assets. It is calculated by dividing current assets by current liabilities.
The calculator uses the Liquidity Ratio formula:
Where:
Explanation: This ratio indicates how many times a company can cover its current liabilities using its current assets. A higher ratio suggests better short-term financial health.
Details: The liquidity ratio is a key indicator of a company's financial health. It helps creditors and investors assess the company's ability to meet its short-term obligations. A ratio below 1 may indicate potential liquidity problems, while a very high ratio might suggest inefficient use of assets.
Tips: Enter the total value of current assets and current liabilities in dollars. Both values must be positive numbers. The calculator will compute the liquidity ratio, which is a dimensionless value.
Q1: What is a good liquidity ratio?
A: Generally, a ratio between 1.5 and 3 is considered healthy, but this can vary by industry. A ratio below 1 may indicate potential liquidity issues.
Q2: How does liquidity ratio differ from quick ratio?
A: The quick ratio (acid-test ratio) is more conservative as it excludes inventory from current assets, providing a stricter measure of liquidity.
Q3: Can a liquidity ratio be too high?
A: Yes, a very high ratio might indicate that a company is not using its assets efficiently to generate revenue and growth.
Q4: How often should liquidity ratio be calculated?
A: It's typically calculated at the end of each accounting period (quarterly or annually) to monitor financial health over time.
Q5: Does industry type affect the ideal liquidity ratio?
A: Yes, different industries have different working capital requirements and normal ratio ranges. It's important to compare with industry benchmarks.