Liquidity

The ability to turn assets into cash.

Cash can be known as working capital.

Cash ———————→ Most liquid

Debtors

Stock

Vehicles/Machinery

Buildings ———————→ Least liquid

Liquidity ratio - ability of the business to pay its debts as they fall due

How to measure liquidity?

current ratio = current assets/current liabilities

If equals 2, then current assets can pay current liabilities twice

Low number (less than 1)

• Unable to cover short term liabilities

• Poor working capital management

High number (10+)

• Current assets usually too high

• Poor working capital management

acid test (quick ratio) = current assets-inventories/current liabilities

• Less relevant for businesses with high stock turnover