Common liquidity ratios include the following: The current ratio Current Ratio Formula The Current Ratio formula is = Current Assets / Current Liabilities. Liquidity is required for a business to meet its short term obligations. Liquidity is a very critical part of a business. USES OF LIQUIDITY RATIOS. So, let’s understand what are the types of liquidity ratios … These ratios can be divided into two broad categories: (A) Liquidity Ratios (B) Stability Ratios. Here are the types of liquidity ratios. Understanding the Two Types of Liquidity Ratios. Liquidity ratios are financial ratios that measure a company’s ability to repay both short- and long-term obligations. There’s more than one type of liquidity ratio that determines the financial health of a banking institution. Liquidity ratios are a measure of the ability of a company to pay off its short-term liabilities. Therefore, the above analysis suggests that liquidity analysis is an important tool to measure the short-term solvency of a company. Quick Ratio; The quick ratio is also called acid test ratio. Current ratio is the type of liquidity ratio that measures the company’s ability to pay its short term liability by comparing the current assets, which the company can convert to cash within one year, to its current liabilities which … There are many variety ratios including current ratio, quick ratio, defensive interval ratio, cash ratio, and working capital ratio. (A) Liquidity Ratios: Financial Ratios: These ratios are calculated to judge the financial position of the concern from long-term as well as short-term solvency point of view. Ratio Analysis: Type # 4. Each of them deserves close attention: 1. They want to determine the risk level involved in giving short term credit to the business. A balance sheet is provided as an example for calculating a company's financial position by measuring its liquidity, which is the ability to pay its current debt with its current assets. Liquidity Ratios: Liquidity ratios are the group of financial ratios that measure entity financial ability to pay its short term debit. In this article, we will consider some commonly used liquidity ratios used in the financial analysis of a company. Types of Liquidity Ratios. These ratios are used externally as well as internally for analysis. Analysts compare the liquidity ratios of one firm to another firm or the industry for comparative analysis. They are very useful to short-term creditors or lenders. It is a liquidity ratio that measures the capability of a business for payment of its current liabilities with only current assets when they come due. Definition, Explanation and Use: Liquidity ratios determine the ability of a business to finance, its day to day operations, or in other words, to pay its debts as they become due out of its current or liquid resources.. Trade payables and short term lenders are more interested in these ratios. The current ratio tells a company’s ability to pay off the debt obligations. Liquidity Ratios. 2 Types of Liquidity Ratio Current Ratio. Liquidity ratios are very useful for analyzing liquidity position of the company. Liquidity Ratios consist of Current Ratio (Also known as Working Capital Ratio), Quick Ratio (Also known as Acid Test), Operating Cash Flow Ratios, and solvency ratio. Measure of the company the company working capital ratio a measure of the company as as. For analyzing liquidity position of the company a company a banking institution: 2 of. Firm to another firm or the industry for comparative analysis a very critical part of a to. 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