Liquidity Ratios

Working Capital

The amount of current assets available after current liabilities are paid. This indicated whether a company will be able to pay its current debts.

Formula: Working Capital = Current Assets - Current Liabilities

Current Ratio

A company can pay its bills and repay its loans. Generally, a ratio of 2:1 is considered to be adequate for most businesses.

Formula: Current Ratio= Current Assets/Current Liabilities

Quick (Acid-Test) Ratio

Measured the company´s ability to pay all current liabilities almost immediately if necessary (short-term liquidity)

Formula: Quick (Acid-Test) Ration= Quick assets/Current liabilities

Merchandise Inventory Turnover

The number of times a company’s inventory is sold during a year. This ratio will be different for each company because of its inventory valuation method. The faster a company sells its inventory, the more efficient and generally more profitable the business.

Formula :

Merchandise Inventory Turnover=Cost of Merchandise Sold/Average Merchandise Inventory

Jan. 1 Merchandise Inventory + Dec.31 Merchandise Inventory/2= Average Merchandise Inventory

Accounts Receivable Turnover

The number of times per year that the business collects the average balance of Accounts Receivable. The accounts receivable turnover ratio is net credit sales divided by average net accounts receivable. The ratio monitors the company’s accounts receivable collection efficiency.

Formula:

Accounts Receivable Turnover=Net Credit Sales/Average Net Accounts Receivable

Beginning Value of Accounts Receivable+ Ending Book Value of Accounts Receivable/2=Average book Value of Accounts Receivable

Average Number of Days for Payment

Accounts receivable turnover should also be looked at in terms of number of dates the receivables were on the books.

Formula: Average Number of Days for Payment=365/Accounts Receivable Turnover Rate