Business Tools for Career Readiness

Finance for
Non-Financial Professionals
Module 3

with David Standen, D.B.A.

Liquidity Ratios
A class of financial metrics

Liquidity Ratios
A class of financial metrics
Used to determine a company's ability to
pay off its short-term debt obligations

Liquidity Ratios
A class of financial metrics
Used to determine a company's ability to
pay off its short-term debt obligations
The higher the value of the ratio, the larger
the margin of safety that the company
possesses to cover short-term debts

Liquidity Ratios:

Working Capital Ratio

Indicates whether a company has enough short

term assets to cover its short term debt.

Liquidity Ratios:

Working Capital Ratio

Indicates whether a company has enough short

term assets to cover its short term debt.
Working Capital Ratio =
Current Assets / Current Liabilities

Liquidity Ratios:

Working Capital Ratio

Indicates whether a company has enough short

term assets to cover its short term debt.
Working Capital Ratio =
Current Assets / Current Liabilities

o Anything below 1 indicates negative W/C

o Anything over 2 means the company is not
investing excess assets
o Most believe a ratio between 1.2 and 2.0 is
sufficient

Liquidity Ratios:

Quick Ratio (Acid Test)

Measures a companys ability to meet its shortterm obligations with its most liquid assets

Liquidity Ratios:

Quick Ratio (Acid Test)

Measures a companys ability to meet its shortterm obligations with its most liquid assets.

Quick Ratio =
(current assets inventories) / current liabilities

Liquidity Ratios:

Quick Ratio (Acid Test)

Measures a companys ability to meet its shortterm obligations with its most liquid assets

Quick Ratio =
(current assets inventories) / current liabilities

Excludes inventories from current assets

Measures the dollar amount of liquid assets available for

each dollar of current liabilities

The higher the quick ratio, the better the company's

liquidity position