What is the liquidity ratio?

The meaning of liquidity ratio is the different indicators and measures whose purpose is to determine if a company is capable of generating treasury, that is, if you have enough capacity to convert your assets into liquidity short term.

All companies have the objective of achieving long-term benefits, this implies that the income is higher than the expenses, also achieving that the profitability achieved by investments is higher than the cost implied by its finance. For its part, in the short term, the business purpose is to generate sufficient liquidity to cover all the payment obligations contracted.

The concept of liquidity ratio is used to determine the capacity of a company to face the obligations contracted in the most recent period of time. The higher the result obtained from the ratio, the more options the company will have to pay off short-term debts.

The ratios that measure the ability of a company to pay its debt in the short term are:

  • The running reason
  • The acid test
  • Defensive test ratio
  • Working capital ratio
  • Liquidity ratios of accounts receivable

How to calculate the liquidity ratio?

The liquidity ratio formula is very simple. You just have to divide the current assets of the company, which includes among others the treasury, the stocks and the rights to collect in the short term, between current liabilities (which refers to the most immediate commitments and payment obligations.

Liquidity ratio = current assets / current liabilities

This formula can give two kinds of results: greater or less than one.

When it is greater than one it implies that the asset of the company is greater than the liability. However, when this figure is much higher than one, it may mean that the company has many active resources that may not be being exploited properly.

On the other hand, if it is less than one, the company will have a liquidity problem, with difficulties to pay the bills and other obligations in the short term.

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