What is the liquidity ratio?

The ratio of liquidity indicates the readiness of the company to generate funds needed to meet its short -term obligations. The situation of liquidity, also known as working capital conditions, determines the relationship between current business assets and current obligations. The current ratio, a form of liquidity ratio, is a direct comparison of current assets to current obligations, while state securities require a ratio of 2: 1 to sell shares. Often considered to be a better indicator of short -term solvency, acid test or a rapid ratio deducts supplies from current assets to determine the relative percentage of cash and money equivalents for current obligations. Some analysts use the ratio of operating cash flows, defined as income by minus business operations compared to current obligations.

shareholders and banks evaluating the loan application routinely examine the situation of liquidity with many contractual contracts on the maintenance of the defined liquidity. Aimed to secure business soilJsky focuses on improving their liquidity ratios on a specific balance sheet date. The current ratio can be increased by means of cash to repay the current debt immediately before the balance sheet date. When improving the current ratio, the long -term loan to repay the short -term debt is also effective. Other possibilities of increasing the company's liquidity ratios include billing orders previously to increase receivables, delay of purchases to reduce payable accounts, transfer stocks or cash and inventory evaluation at the end for higher value.

While the liquidity ratio provides a general estimate of short -term solvency, it can be misleading when it is considered an absolute indicator of the health of society. These conditions are based on the conceptual disposal of all current assets of the company at MVŠECHNY its current obligations, not operating companies. On the other hand, often excludeThe Cash Conversion cycle (CCC) provides critical data on the efficiency of the company management and its ability to pay current obligations. CCC evaluates the speed at which the company converts its inventory into sale, collects on its accounts and pays its sellers for goods and services. It is calculated by adding time for the days when the product sits in inventory in the time that the company takes to collect receivables minus the time required to pay their accounts, with a shorter cycle indicating higher liquidity.