Answer:
There are several types of liquidity ratios. The most used and important ones are listed below:
1. Current Ratio = Current Assets / Current Liabilities
Current ratio indicates that the company's availability of the
current assets to pay off its short term obligations (current
liabilties)
The current ratio greater than 1 indicates a positive financial
performance of the company.
2. Quick Ratio = (Current Assets - Inventory) / Current
Liabilties
Quick Ratio also known as acid test ratio indicates availability of
more liquid assets to pay off its current liabilities. Inventory is
not included while calculating quick ratio.
A quick ratio greater than 1 is ideal for the company and indicates
stable financial performance of the company.
3. Cash Ratio = Cash and cash equivalents / Current
Liabilties
Cash ratio indicates the availability of cash in the company to
meet its current liabilties.
Again, a cash ratio greater than or equal to 1 implies a stable
position.
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