Question

What is the liquidity Ratio? Define current Ratio.

Hint:

Remember: Current Ratio = Current Assets / Current Liabilities. It measures short-term solvency. A ratio of 2:1 is generally considered healthy, meaning the company has twice the assets needed to cover its short-term debts.

Answer 1

Step 1: Understanding the Concept:
Liquidity refers to how quickly a company can turn its assets into cash to pay off debts.
Step 2: Key Formula or Approach:
\[ \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} \]
Step 2: Detailed Explanation:
Liquidity Ratio: These are financial ratios that indicate a company’s ability to pay off its short-term debts (liabilities) using its short-term assets.
Current Ratio: This is a specific liquidity ratio that compares all current assets (cash, inventory, receivables) to all current liabilities (short-term loans, payables).
A ratio of 1.0 or higher usually means the company is in good health to meet its immediate obligations.
Step 3: Final Answer:
Liquidity ratios measure short-term solvency, and the current ratio is the most common metric used to evaluate this capability.