The Online Liquidity Ratio Calculator allows us to calculate precisely and accurately the measures of liquidity. This calculator will give solutions to the measures of the liquidity of a business or organization - current ratio, quick ratio, cash ratio, and working capital.
The liquidity ratio affects the credibility of an organization or company and also its credit ratings. If there are continuous defaults in repayment of a short-term liability then this will cause bankruptcy. That's why this ratio plays an important role in the financial stability of any company and its credit ratings.
To know how quickly an organization can convert its current assets into cash so that it can pay off its liability in a given time also you can boost your skills and knowledge about liquidity ratio easily with the help of the given module.
Liquidity is the ability of an organization to meet an expense or settle a due liability towards its stakeholders. Liquidity Ratios are required to measure liquidity. Using these ratios one can easily get the answers to the queries related to the current liquidity position of an entity.
Short-term assets that can be quickly converted into cash, either immediately or within twelve months, for the payment of the debt / current expenses.
Those liabilities that are due now or within the next year are known as Current Liabilities. Expenses that have been incurred in the current year include operation costs, supplies, and materials, loans coming due during the current year, etc.
A company's items that it has purchased or produced and anticipates selling.
This includes actual cash on hand as well as money stored in bank accounts that is readily accessible.
Investing in low-risk securities that mature within 3 months. A few examples include money market holdings, Treasury bills, preferred stocks acquired shortly before maturity, and certain types of bonds.
The process of calculating liquidity ratio is explained with the example by using the formulas of liquidity ratio. Learn the step-by-step process of manually calculating the Liquidity Ratio from here with an example.
In this fast-changing world, we want answers to all the lengthy calculations easily, check many more ratio calculators, and boost your math concepts with the help of arithmeticcalculator.com. Let us understand the concept of Liquidity Ratio calculation with the help of a solved example.
Example:
Calculate the Liquidity Ratio of a company using the several given particulars:
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Sundry Debtors = 150,000 Inventories = 120,000 Cash-in-hand = 100,000 Bills Receivable = 200,000 Creditors = 500,000 Bank Overdraft = 50,000 |
Solution:
Calculating, Current Ratio:
Current Ratio = Current Assets ÷ Current Liabilities
The total current assets of a company can be calculated by adding Sundry Debtors, Inventories, Cash-in-hand, and Bills Receivable.
Current Assets = Sundry Debtors + Inventories + Cash-in-hand + Bills Receivable
Current Assets= 150,000 + 120,000+ 100,000+ 200,000= 570,000
Similarly, the total current liabilities can be calculated by adding Creditors and Bank Overdraft.
Current Liabilities = Creditors + Bank Overdraft
Current Liabilities = 500,000+ 50,000= 550,000
Hence, The Current Ratio becomes,
Current Ratio= 570,000 / 550,000 = 1.03 :1.
Calculating, Quick Ratio:
Quick Ratio = (Current Assets - Inventory) ÷ Current Liabilities
The Current Assets and Current Liabilities are already calculated above,
Current Assets=570,000
Inventories=120,000
Current Liabilities = 550,000
Hence, The Quick Ratio becomes,
Quick Ratio = ( 570,000-120,000) ÷ 550,000 = 0.81:1
Calculating, Cash Ratio:
Cash Ratio = (Cash + Cash Equivalents) ÷ Current Liabilities
Given that,
Cash-in-hand = 100,000 and Current Liabilities = 550,000
Hence, The Cash Ratio becomes,
Cash Ratio = 100,000 ÷ 550,000 = 0.18:1
Calculating, Working Capital:
Working Capital = Current Assets - Current Liabilities
Current Assets=570,000 and Current Liabilities = 550,000
Hence, The Working Capital becomes,
Working Capital = 570,000- 500,000 = 70,000
1. What is a good ratio for liquidity?
Precisely, a liquidity ratio is considered to be "good" if it is more than 1. In general, creditors and investors will look for an accounting liquidity ratio of approximately 2 or 3.
2. What is the purpose of calculating the liquidity ratio?
Liquidity ratios examine a company's ability to cover short-term debts and cash flows, while solvency ratios are for a longer-term ability to pay ongoing debts. So, it's useful for calculating the liquidity ratio of a company.
3. Which liquidity ratio is most important?
The cash ratio is the most important liquidity ratio of all.
4. What is a "basic liquidity ratio"?
Basic Liquidity Ratio = Cash or Cash Equivalents divided by monthly expenditures. The higher the digit, the more liquid the company's assets are.