Financial analysis: Liquidity ratio

What is liquidity ratio used for?

To assess the ability of the business to pay its immediate depts. Liquidity ratio shows how much money is available to pay bills.

What is meant by the liquidity of an asset and how can it be improved?

Liquidity of an asset is how easily it can be turned into cash.

This can be improved by:

-Decreasing stock levels

-Speeding up collection of depts

-Slowing down payments to creditors

What is the equation for current ratio?

Current assets/current liabilities.

NOTE: Current assets are things you own but will sell for money such as inventory

Current liabilities are thing you have to pay in the near future such as overdrafts

What does current ratio show?

The liquidity position of the business ability to pay current liabilities which could be called in quickly.