Question

What are the 3 Liquidity Ratios (if I lend money or if I'm a supplier, will I get my money back)?

Answer 1

The 3 Liquidity Ratios are the Current Ratio, Quick Ratio, and Cash Ratio, which assess a company's ability to pay its short-term liabilities and indicate the likelihood of a lender or supplier getting their money back.

Step-by-step explanation:

The 3 Liquidity Ratios that are concerned with whether a lender or supplier will get their money back from a company include:

Current Ratio: This measures the company's ability to pay its short-term liabilities with its short-term assets.

Quick Ratio: Also known as the acid-test ratio, this measures the company's ability to pay its short-term liabilities immediately with its most liquid assets.

Cash Ratio: This is the most conservative liquidity ratio, measuring the company's ability to cover short-term liabilities with cash and cash equivalents alone.

Liquidity ratios are important for assessing the financial health of a company and its capability to meet its short-term obligations. High liquidity indicates a higher chance of a company being able to pay back its debts and therefore presents less risk to lenders and suppliers.

Answer 2

The three key liquidity ratios include the Current Ratio, Quick Ratio, and Cash Ratio, which assess a company's ability to satisfy short-term debts and are crucial for evaluating the risk of lending to or supplying goods to a company.

Step-by-step explanation:

When evaluating the financial health of a company, particularly concerning the company's ability to meet short-term obligations, three key liquidity ratios are often used. These ratios are essential tools for lenders and suppliers as they assess the risk associated with lending money or providing goods on credit.

• Current Ratio: This ratio measures a company's ability to pay its short-term debts with its short-term assets. It is calculated by dividing current assets by current liabilities.
• Quick Ratio (also known as the acid-test ratio): This ratio is a more stringent measure than the current ratio because it excludes inventory from current assets. It focuses on the company's most liquid assets and is calculated by subtracting inventory from current assets and then dividing by current liabilities.
• Cash Ratio: This ratio is the most conservative liquidity ratio. It measures the company's ability to pay off short-term liabilities with cash and cash equivalents alone. The ratio is given by dividing cash and cash equivalents by current liabilities.

These ratios provide insights into a company's operational efficiency, financial flexibility, and overall liquidity. A company with higher liquidity ratios is typically seen as more capable of paying its debts promptly, meaning lenders and suppliers might consider it a lower-risk borrower or business partner. However, very high liquidity can also indicate that a company is not efficiently using its assets to grow and expand.