• Leverage Ratio
  • Liquidity ratio
  • Liquidity ratio

    DEFINITION OF 'Liquidity ratio'

    It measures the company ability to pay its short term debt, and this can be done by putting side by side the company liquid assets and short term liability. Some of the liquidity ratios are –

    • Current ratio
    • Quick ratio
    • Cash ratio
    • Cash conversion cycle

     

    The dissimilarity between these ratios is the type of assets used for calculation; Current ratio includes the Current assets whereas Quick ratio excludes some of the current assets such as inventory. Cash ratio only includes cash and marketable security as assets.

     

    1.  In conclusion we can say that the higher the ratio better it is, as it is clear signal that company can clear its short term debt
    2.  but a high ratio is a indication that large amount is blocked in working capital and cash which can affect the profitability of the company

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  • Liquidity Trap