What is meant by liquidity ratios?

What is meant by liquidity ratios?

Liquidity can be defined as: “the extent of the company’s ability to repay its short-term debt.” Therefore, liquidity ratios provide information about companies’ ability to pay short-term debt or meet their short-term obligations.

Common liquidity ratios include the following:

Current ratio:
 The company’s ability to pay short-term liabilities with current assets

Current ratio: current assets/current liabilities

Instant ratio: 
A company’s ability to pay its short-term liabilities from cash assets

Current ratio (quick) = current assets – inventory of materials and goods / current liabilities

Cash ratio: 
The company’s ability to pay its short-term debts from cash. This ratio is the most conservative liquidity ratio that does not include accounts receivable.

Cash ratio = cash balance + short-term investments / current liabilities

Investigating leverage ratios or capital structure

Leverage ratios measure the amount of resources received from debt. In fact, leverage ratios are used to assess the company’s short and long-term debt levels. Leverage ratios include the following:

debt ratio:
 A company’s ability to pay its short and long-term liabilities with its total assets

Debt ratio = total liabilities / total assets

Ratio of facilities to capital: 
The extent to which the company relies on bank borrowing and equity to finance itself

Ratio of facilities to capital = total facilities / total facilities + equity

Interest coverage ratio: 
It shows the company’s ability to pay financial expenses, for example, the interest on loans received from the place of operating profit

Interest coverage ratio = operating profit/financial expenses
Mehdi Koh Soltani (financial services, accounting, financial and tax consultant):
Group of accountants, auditors, Tabriz
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