1. What is the Liquidity Ratio?

The Liquidity Ratio, also known as the Current Ratio, measures a company's ability to pay off its short-term liabilities with its short-term assets. It is a key indicator of a company's financial health and short-term liquidity position.

2. How Does the Calculator Work?

The calculator uses the Liquidity Ratio formula:

Where:

• Current Assets — Cash and other assets that are expected to be converted to cash within one year
• Current Liabilities — Debts and obligations that are due within one year

Explanation: The ratio indicates how many times a company's current assets can cover its current liabilities. A higher ratio suggests better short-term financial health.

3. Importance of Liquidity Ratio

Details: The Liquidity Ratio is crucial for assessing a company's short-term financial stability. It helps creditors, investors, and management evaluate the company's ability to meet its short-term obligations without raising external capital.

4. Using the Calculator

Tips: Enter current assets and current liabilities in the same currency units. Both values must be positive numbers greater than zero for accurate calculation.

5. Frequently Asked Questions (FAQ)

Q1: What is a good Liquidity Ratio?
A: Generally, a ratio between 1.5 and 3 is considered healthy. A ratio below 1 may indicate potential liquidity problems, while a ratio above 3 might suggest inefficient use of assets.

Q2: How does Liquidity Ratio differ from Quick Ratio?
A: While both measure short-term liquidity, the Quick Ratio (Acid-Test Ratio) excludes inventory from current assets, providing a more conservative measure of liquidity.

Q3: Can the ratio be too high?
A: Yes, an excessively high ratio may indicate that the company is not using its current assets efficiently to generate revenue and growth.

Q4: How often should the ratio be calculated?
A: It's typically calculated quarterly or annually as part of financial statement analysis, but can be monitored more frequently for businesses with volatile cash flows.

Q5: Does industry affect the ideal ratio?
A: Yes, optimal ratios vary by industry. Service businesses typically have higher ratios than manufacturing businesses due to different asset structures.