1. Current Ratio: This ratio is used to measure the company’s short-term liquidity, which is the ability of the firm to pay its current liabilities. This ratio is calculated by dividing the current assets by current liabilities.
2. Quick Ratio: This ratio is also known as the acid-test ratio. It helps to measure the company’s ability to meet its short-term financial obligations without relying on inventory. This ratio is calculated by dividing the quick assets by current liabilities.
3. Cash Ratio: This ratio measures the company’s ability to pay off its short-term obligations using cash and its equivalents. This ratio is calculated by dividing the sum of cash and cash equivalents by the current liabilities.
4. Operating Cash Flow Ratio: This ratio measures the company’s ability to pay off its short-term debts using its operating cash flows. This ratio is calculated by dividing the operating cash flow by current liabilities.
5. Net Working Capital Ratio: This ratio measures the company’s ability to meet its obligations on time by using its current assets, especially the working capital. This ratio is calculated by subtracting current liabilities from current assets.
Define five types of liquidity ratios
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