Liquidity ratios
It measures the availability of cash and other liquid assets to meet the current liabilities of the firm.
Current Ratio
The current ratio compares total current assets to total current liabilities and is intended to indicate whether there are sufficient short-term assets to meet the short-term liabilities.
Current assets: Current liabilities
The ratio when calculated may be expressed as either a ratio or 1, with current liabilities being set to 1, or as ‘number of times’, representing the relative size of the amount of total current assets compared with total current liabilities.
A ratio of 2:1 or current assets as 2 times is considered to be healthy for a business.
Acid test ratio
It is quite similar to Current ratio. The only difference in the items involved between the two ratios is that the acid test ratio or quick ratio does not include stock.
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Acid Test ratio |
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Current assets-Stock
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Current liabilities
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An acid test ratio 1:1 is considered as healthy. If it is below 1 it suggest the business has insufficient liquid assets to meet their short term liabilities.