Liquidity Ratio Measures the relationship between current assets and current liabilities with the help of data extracted from the balance sheet of the company Assess the ability of business to meet its short-term obligation usually one year Assess whether the business has sufficient cash and current assets to pay back its current liabilities Types of Liquidity Ratio Current Ratio, Quick Ratio, Cash Ratio Current Ratio It measures the ability of the business to meet its current liabilities by converting current assets into cash during the operating cycle of the firm to pay off the debt efficiently on time Higher the current ratio, better is the firm’s position in managing its working capital The standard current ratio showing an efficient liquidity is 2:1 Formula, Current Ratio = (𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐀𝐬𝐬𝐞𝐭𝐬)/(𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬) Quick Ratio Quick ratio is also known as acid-test ratio It takes into account only those current assets which are highly liquid so it excludes the inventory/stocks from current asset Formula, Quick Ratio = (𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐀𝐬𝐬𝐞𝐭𝐬 −𝐒𝐭𝐨𝐜𝐤𝐬 −𝐏𝐫𝐞𝐩𝐚𝐢𝐝 𝐄𝐱𝐩𝐞𝐧𝐬𝐞𝐬)/(𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬) Quick assets = Current Assets – Stocks – Prepaid Expenses A standard quick ratio is considered to be 1:1 which is safe for any business Thus, quick ratio is an indicator of a company’s short-term liquidity position and measures ability of business to meet its short-term obligations with most liquid assets Cash Ratio Cash ratio is the most stringent measure of liquidity which takes into account only cash & cash equivalents to get the working capital efficiency of business The metric calculates a company's ability to repay its short-term debt with readily-liquidated cash resources Formula, Cash Ratio = (𝐂𝒂𝒔𝒉 & 𝑪𝒂𝒔𝒉 𝑬𝒒𝒖𝒊𝒗𝒂𝒍𝒆𝒏𝒕𝒔)/(𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬) Cash equivalents are the assets that can speedily get converted into cash as and when required like cash on hand, demand deposits, money market instruments, savings accounts. Thank you for Watching Subscribe to Devtech Finance

1. LIQUIDITY RATIO
RATIO ANALYSIS

2. INTRODUCTION
• Measures the relationship between current assets and current
liabilities with the help of data extracted from the balance sheet
of the company
• Assess the ability of business to meet its short-term obligation
usually one year
• Assess whether the business has sufficient cash and current
assets to pay back its current liabilities

3. BALANCE SHEET
EQUITY & LIABILITIES
• Shareholder’s Fund
• Non- Current Liabilities
• Current Liabilities-
Short- term borrowings
Trade payables
Short-term provisions
Accrued expenses
ASSETS
• Non-current Assets
• Current Assets-
Current Investments
Inventories
Trade receivables
Cash
Prepaid expenses

4. TYPES OF LIQUIDITY RATIO
Liquidity Ratio
Current Ratio Cash RatioQuick Ratio

5. Current Ratio
Current Assets
Current Liabilities

6. CURRENT RATIO
• It measures the ability of the business to meet its current liabilities by
converting current assets into cash during the operating cycle of the firm
to pay off the debt efficiently on time
• Higher the current ratio, better is the firm’s position in managing its
working capital
• The standard current ratio showing an efficient liquidity is 2:1
• Formula, Current Ratio =
𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐀𝐬𝐬𝐞𝐭𝐬
𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬

7. QUICK RATIO
• Quick ratio is also known as acid-test ratio
• It takes into account only those current assets which are highly liquid so it excludes the
inventory/stocks from current asset
• Formula, Quick Ratio =
𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐀𝐬𝐬𝐞𝐭𝐬 −𝐒𝐭𝐨𝐜𝐤𝐬 −𝐏𝐫𝐞𝐩𝐚𝐢𝐝 𝐄𝐱𝐩𝐞𝐧𝐬𝐞𝐬
𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬
• Quick assets = Current Assets – Stocks – Prepaid Expenses
• A standard quick ratio is considered to be 1:1 which is safe for any business
• Thus, quick ratio is an indicator of a company’s short-term liquidity position and
measures ability of business to meet its short-term obligations with most liquid assets.

8. CASH RATIO
• Cash ratio is the most stringent measure of liquidity which takes into account
only cash & cash equivalents to get the working capital efficiency of business
• The metric calculates a company's ability to repay its short-term debt with
readily-liquidated cash resources
• Formula, Cash Ratio =
𝐂𝒂𝒔𝒉 & 𝑪𝒂𝒔𝒉 𝑬𝒒𝒖𝒊𝒗𝒂𝒍𝒆𝒏𝒕𝒔
𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬
• Cash equivalents are the assets that can speedily get converted into cash as
and when required like cash on hand, demand deposits, money market
instruments, savings accounts.

9. BALANCE SHEET
EQUITY & LIABILITIES
• Shareholder’s Fund 1,00,000
• Non- Current Liabilities 50,000
• Current Liabilities-
Short- term borrowings 20,000
Trade payables 10,000
Short-term provisions 5,000
Accrued expenses 5,000
ASSETS
• Non-current Assets 1,20,000
• Current Assets-
Current Investments 20,000
Inventories 15,000
Trade receivables 10,000
Cash 20,000
Prepaid expenses 5,000

10. NUMERICAL EXAMPLES
From the given balance sheet find out the :-Current Ratio, Quick Ratio & Cash Ratio
1.Current Ratio =
𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐀𝐬𝐬𝐞𝐭𝐬
𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬
Current Assets = C. Invst. + Stock + T/R + Cash + P.Exp
= 20,000 + 15,000 + 10,000 + 20,000+ 5,000 = 70,000
Current Liabilities = S.T. Borrowings + T/P + S.T. Prov. + Accr. Exp
= 20,000+ 10,000+ 5,000+ 5,000 = 40,000
Current Ratio =
70,000
40,000
= 1.75

11. CONTINUED
• Quick Ratio =
𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐀𝐬𝐬𝐞𝐭𝐬 −𝐒𝐭𝐨𝐜𝐤𝐬 −𝐏𝐫𝐞𝐩𝐚𝐢𝐝 𝐄𝐱𝐩𝐞𝐧𝐬𝐞𝐬
𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬
=
𝟕𝟎,𝟎𝟎𝟎−𝟏𝟓,𝟎𝟎𝟎−𝟓,𝟎𝟎𝟎
𝟒𝟎,𝟎𝟎𝟎
= 1.25
• Cash Ratio =
𝐂𝒂𝒔𝒉 & 𝑪𝒂𝒔𝒉 𝑬𝒒𝒖𝒊𝒗𝒂𝒍𝒆𝒏𝒕𝒔
𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬
=
𝟐𝟎,𝟎𝟎𝟎+𝟐𝟎,𝟎𝟎𝟎
𝟒𝟎,𝟎𝟎𝟎
= 1

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