|
Liquidity
Liquidity is the amount of net working capital left over in the form of cash, accounts receivable and other assets after all current bills are paid in full. In other words — net current assets less current liabilities.
Two financial ratios are used to analyze a company's liquidity. These are the current ratio and the acid test. First, current ratio:
|
| |
|
Current Assets |
|
Current Ratio |
= |
––––––––––––––– |
| |
|
Current Liabilities |
Creditors generally expect a current ratio to equal or exceed two. When the current ratio equals two or more, net working capital equals or exceeds current liabilities.
The second ratio used to analyze liquidity is called the acid test. |
| |
|
Quick Assets |
|
Acid Test |
= |
–––––––––––––––
|
| |
|
Current Liabilities |
Quick assets are current assets with inventory values removed. A corporation is considered healthy if the acid test shows a value of 1 or more. |
|
Back to Top | Next
Ohio National is not affiliated with, nor does it endorse or sponsor, any particular prospecting, marketing or selling system.
