Glossaries - Report Companions: Financial Analysis Edge - Liquidity Ratios

These financial ratios are generally understood as measures of firm and industry liquidity: All ratios are derived from balance sheet data.

1. Quick Ratio
(Cash + Accounts Receivable)/ Current Liabilities

The Quick Ratio indicates liquid assets available to cover current debt. It is also known as the Acid Ratio. This is a "harsher" version of the Current Ratio, which balances short-term liabilities against cash and liquid instruments. Generally, any value of less than 1 to 1 suggests an over-reliance on inventory or other current assets to pay off shortterm debt.

2. Current Ratio
Current Assets/ Current Liabilities

The Current Ratio measures current assets available to cover current liabilities, a test of near-term solvency. The ratio indicates to what extent cash on hand and disposable assets are enough to pay off near term liabilities. Higher ratios indicate a better buffer between current obligations and a firm's ability to pay them. The quality of current assets is a critical factor in interpreting this analysis.

3. Current Liabilities to Net Worth
Current Liabilities / Net Worth

This ratio reflects a level of security for creditors. The larger the ratio relative to industry norms, the less security there is for creditors.

4. Total Liabilities to Net Worth
Total liabilities/ Net Worth

This ratio helps to clarify the impact of long-term debt, which can be seen by comparing this ratio with Current Liabilities: Net Worth. Creditors are concerned to the extent that total liability levels exceed Net Worth.

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