Liculaty Analysis: Liquidity Analysis

1. Liquidity ratios are a class of financial metrics that is used to determine a company's ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts.

Ratio analysis shows the correlation within certain figures of financial statements, like current assets and current liability, and is used for three types of company needs- within, intra- and inter-company. Association can be shown in proportion, rate, or percentage and can evaluate company’s liquidity, profitability, and solvency. Liquidity ratios show company’s ability to pay obligations and fulfill needs for cash; profitability ratios show wellbeing and success for the certain time period; and solvency ratios show company’s endurance over the years.

The current ratio is used to show if a business can raise enough money to pay the debts that it has.

Liquidity represents a company’s ability to pay its short-term obligations. In the following schedule is the calculation of the ratios that are indicators of the liquidity position of a company.

Liquidity ratios measure a company’s capability in achieving their short-term financial debts, for example current assets ratio and quick ratio. (Campbell R.Harvey, 2004b)

Basically the liquidity ratios are used to determine a company’s ability to cover its short term obligations when are in financial distress and these obligations are due.

In measuring the firm’s overall liquidity, we used the current and acid-test ratios to analyze its ability to pay bills on time. The current ratio compares the company’s

i. Liquidity Ratios: measures the liquidity of the firm’s current assets to their current liabilities (or obligations to creditors).

The liquidity ratios show that both companies A and B might not face liquidity problem. Current ratio and quick ratio of company A are higher than company B. Company A holds more current asset in term of cash and short term investments. These cash and short term investments can be used to invest in the future.

Liquidity ratios. They are used to determine whether an organization is capable of paying off its immediate debt responsibilities. The value of the ratio is used to determine the margin of well-being in possession of the health organizations to pay off the short- term debts. The financial health of these organizations can be strongly demonstrated using these ratios. The liquidity ratios are explained below.

The current ratio is considered to be the most simplified liquidity test. It essentially signifies a company 's capacity to satisfy its short-term liabilities utilizing its short-term assets. A current ratio which is larger than or equal to one shows that current assets should have the ability to satisfy its short-term obligations. A current ratio that is less than one may entail

Liquidity reflects the ability of a firm to meet its short-term obligations using those assets that are most readily converted into cash. Liquidity ratios, current ratio and quick ratio, tell about the company’s ability to meet its immediate obligations. (Foster, 1986)

The liquidity of a company is the ability to meet its loan obligations as it relates to its current assets and its current liabilities (Marshall, 2002). Appendix B shows that we have analyzed three important liquidity ratios: 1) Current Ration, 2) Acid Test, and 3) Working Capital. Of these three, the best indicators of liquidity, when trying to show trends, are the Acid test and the Current Ratio. A current ratio of 2 and an acid test of 1.0 are considered "adequate liquidity" (Marshall, 2002). Sample Company's Acid Test numbers for 2000 and 2001 were .84 and .79, and its Current Ratio numbers for 2000 and 2001 were 1.45 and 1.54. Each sets of these ratio figures indicate that Sample Company could possibility have some difficulties in meeting its financial obligations, so these numbers will be important to watch closely in the future.

2. Liquidity ratios are used to measure the ability of the company to meet its obligations for the coming year. The main liquidity ratio is the current ratio, which is the current assets over current liabilities. The quick ratio excludes inventories from the current assets, and the cash ratio is simply the amount of cash divided by the current liabilities. These ratios are often benchmarked against industry norms and against past performance.

Liquidity proportions are the proportions that gauge the capacity of an organization to meet its transient obligation commitments. These proportions measure the capacity of an organization to pay off its fleeting liabilities when they fall due.