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How to measure liquidity?
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25th Nov 2009 by Amelia Timbers
The best way to measure liquidity is the "quick ratio", also known as "acid test". All this formula is are total assets over total liabilities. The idea behind it is to measure how quickly a debtor could pay off their debts if they need to. The current ratio is the same thing, but with current assets over current liabilities. This addresses a debtor's ability to pay off short term debts with current assets, and measures near term liquidity. Liquidity is an important indicator of financial health; significant debt, long or short term, is challenging to overcome without the assets to pay them.
The best way to measure liquidity is the "quick ratio", also known as "acid test". All this formula is are total assets over total liabilities. The idea behind it is to measure how quickly a debtor could pay off their debts if they need to. The current ratio is the same thing, but with current assets over current liabilities. This addresses a debtor's ability to pay off short term debts with current assets, and measures near term liquidity. Liquidity is an important indicator of financial health; significant debt, long or short term, is challenging to overcome without the assets to pay them.
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24th Nov 2009 In Business
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Subjects: liquidity,