Analyzing Liquidity Ratios

Creditors, as you might expect, are much concerned by the issue of liquidity, or a company's ability to meet its debts as they come due. As earlier chapters in this book have discussed, a company's total assets may be considerable, but if those assets are difficult to convert to cash it is possible that the company might be unable to pay its creditors in a timely fashion. Creditors want their loans to be paid in the medium of cash, not in a medium such as inventory or factory equipment.

Two useful measures of a company's liquidity are the current ratio and the quick ratio.

Determining the Current Ratio

The current ratio compares a company's current assets (those that can be converted to cash during the current accounting ...

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