Liquidity

Short term Liquidity

Short term liquidity position is determined by:
Current Ratio Quick Ratio Working capital to sales percentage Interest cover

Current Ratio
Ratio of Current asset to current liabilities Ideal Current Ratio: 2:1 Current asset ->Amount of liquidity Current liability->upcoming cash requirement Disadvantage
Does not differentiate between different types of current asset.

Quick Ratio
(Current asset Inventories) / (current liabilities) Inventory are excluded because they are less liquid Both the above ratios are derived by balance sheet only.

Working capital to sales ratio

This ratio takes into account the P&L account also. Relates to short term surplus liquidity to annual operating cash flows. Lower ratio is favorable. Overtrading: Sales increase rapidly but levels of working capital is static.

Working capital days

Goods are received from supplier Average stock holding period (till goods are sold) Customer makes the payment. Company has to fund the time gap between the cash paid to supplier and cash received from customer.