{"id":25528559,"date":"2022-06-14T10:00:46","date_gmt":"2022-06-14T04:30:46","guid":{"rendered":"https:\/\/entri.app\/blog\/?p=25528559"},"modified":"2022-06-30T13:51:56","modified_gmt":"2022-06-30T08:21:56","slug":"liquidity-ratios-definition-type-formula-examples","status":"publish","type":"post","link":"https:\/\/entri.app\/blog\/liquidity-ratios-definition-type-formula-examples\/","title":{"rendered":"Liquidity Ratios: Definition, Type, Formula, Examples"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_79_2 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-69ea329113e67\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-69ea329113e67\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/entri.app\/blog\/liquidity-ratios-definition-type-formula-examples\/#Types_of_Liquidity_Ratio\" >Types of Liquidity Ratio<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/entri.app\/blog\/liquidity-ratios-definition-type-formula-examples\/#Liquid_Ratio_Formula\" >Liquid Ratio Formula<\/a><\/li><\/ul><\/nav><\/div>\n<p>\u2018Liquidity\u2019 has a big role in business which is essential in a business to fulfill its short period commitment. In other words \u2018Liquidity Ratio\u2019 defines a company\u2019s potential to repay short-time creditors out of its whole cash. It\u2019s the outcome of parting the total cash by short-time borrowings, which denotes the no. of times short period liabilities are balanced by cash. Liquidity Ratio computes how fast assets can transform into cash so as to pay the short-term obligation of the company. Higher the ratio, effortless is the capacity to cover the debt and eliminate the error on payment. However, it is very important for creditors to know prior to offering short period loans to the business. Any organization that fails to clear the debt will result in building a large impact on the company and also affects the company\u2019s credit ratings.<\/p>\n<p>In this article, you will learn all the essentials you need to know about Liquidity Ratio. Read the complete article for Definition, Type, Formula and Examples.<\/p>\n<p style=\"text-align: center;\"><a href=\"https:\/\/entri.sng.link\/Dcofz\/mirx\/94jw\" target=\"_blank\" rel=\"noopener\"><strong>Enroll for upskilling courses! Download Entri App!\u00a0<\/strong><\/a><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Types_of_Liquidity_Ratio\"><\/span><strong>Types of Liquidity Ratio <\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>The Liquidity Ratios has numerous ratios which are to investigate the financial position of a company. Given below are the available types of Liquidity Ratios;<\/p>\n<h3><strong>1. Current Ratio<\/strong><\/h3>\n<p>The Current Ratio can be defined as the easiest Liquidity Ratio that is used to calculate and interpret the financial stability of a company. With the help of this ratio, one can easily figure out the current assets and current liabilities line units on the company\u2019s annual report. Commonly, 2:1 is adopted as the ideal ratio and differs depending on the type of industry.<\/p>\n<h4><strong>Example <\/strong><\/h4>\n<table width=\"395\">\n<thead>\n<tr>\n<td width=\"102\"><strong>Current Assets<\/strong><\/td>\n<td width=\"123\"><strong>Current Liabilities<\/strong><\/td>\n<td width=\"170\"><strong>Current Ratio (current assets \/ current liabilities)<\/strong><\/td>\n<\/tr>\n<tr>\n<td width=\"102\">Rs. 260 crore<\/td>\n<td width=\"123\">Rs. 130 crore<\/td>\n<td width=\"170\">Rs. 260 crore \/ Rs 130 crore = 2:1<\/td>\n<\/tr>\n<\/thead>\n<\/table>\n<h3><strong>2. Quick Ratio\/ Acid Test Ratio<\/strong><\/h3>\n<p>Quick Ratio test is one of most suitable measures to test liquidity in the company. Compared with Current Ratio, Quick Ratio is more conventional. The Quick asset is calculated by balancing the current assets to remove assets that are not in cash. Generally, the ratio 1:1 is considered as an ideal.<\/p>\n<h4><strong>Example<\/strong><\/h4>\n<table width=\"310\">\n<thead>\n<tr>\n<td width=\"149\"><strong>Current Assets Particulars<\/strong><\/td>\n<td width=\"161\"><strong>Amount (Crore)<\/strong><\/td>\n<\/tr>\n<tr>\n<td width=\"149\">Marketable Securities<\/td>\n<td width=\"161\">Rs 15,000<\/td>\n<\/tr>\n<tr>\n<td width=\"149\">Cash and Equivalents<\/td>\n<td width=\"161\">Rs 65,000<\/td>\n<\/tr>\n<tr>\n<td width=\"149\">Inventory<\/td>\n<td width=\"161\">Rs 45,000<\/td>\n<\/tr>\n<tr>\n<td width=\"149\">Accounts Receivables<\/td>\n<td width=\"161\">Rs 35,000<\/td>\n<\/tr>\n<tr>\n<td width=\"149\">Total Current Assets<\/td>\n<td width=\"161\">Rs 160,000<\/td>\n<\/tr>\n<tr>\n<td width=\"149\">Total Current Liabilities<\/td>\n<td width=\"161\">Rs 60,000<\/td>\n<\/tr>\n<tr>\n<td width=\"149\">Current Ratio<\/td>\n<td width=\"161\">According to formula 1 = sum( 15,000 + 65,000 + 35,000) \/ 60,000<\/p>\n<p>=1.91<\/p>\n<p>According to formula 2 = sum(160,000 \u2013 45,000)\/ 60,000<\/p>\n<p>= 115,000\/60,000<\/p>\n<p>= 1.91<\/td>\n<\/tr>\n<\/thead>\n<\/table>\n<h3><strong>3. Cash Ratio<\/strong><\/h3>\n<p>Cash Ratio computes the company\u2019s liquid assets such as cash, tradable securities. Company utilizes this asset to pay short-term commitment. However, money is the most liquid form of assets, this ratio tells us the speed and limit at which a company can repay its present dues by using readily available assets.<\/p>\n<p style=\"text-align: center;\"><a href=\"https:\/\/entri.sng.link\/Dcofz\/mirx\/94jw\" target=\"_blank\" rel=\"noopener\"><strong>Enroll for Stock Marketing Course! Download Entri App!<\/strong><\/a><\/p>\n<h3><strong>4. Absolute Liquid Ratio<\/strong><\/h3>\n<p>This ration is primarily used to measure the liquidity total accessible to the company. The Absolute Liquidity Ratio appraises only marketable securities and cash obtainable to the company. The ratio only measures short-term liquidity in the form of marketable securities, current investment and cash.<\/p>\n<h4><strong>Example <\/strong><\/h4>\n<table width=\"555\">\n<thead>\n<tr>\n<td width=\"140\"><strong>Liquid Assets Particulars<\/strong><\/td>\n<td width=\"142\"><strong>Amount in Crore<\/strong><\/td>\n<td width=\"142\"><strong>Current Liabilities Particulars<\/strong><\/td>\n<td width=\"132\"><strong>Amount in Crore<\/strong><\/td>\n<\/tr>\n<tr>\n<td width=\"140\">Cash and Equivalent<\/td>\n<td width=\"142\">Rs 1,65,000<\/td>\n<td width=\"142\">Bills Payables<\/td>\n<td width=\"132\">Rs 90,000<\/td>\n<\/tr>\n<tr>\n<td width=\"140\">Marketable Securities<\/td>\n<td width=\"142\">Rs 75,000<\/td>\n<td width=\"142\">Bank Overdraft<\/td>\n<td width=\"132\">Rs 80,000<\/td>\n<\/tr>\n<tr>\n<td width=\"140\">Accounts Receivables<\/td>\n<td width=\"142\">Rs 90,000<\/td>\n<td width=\"142\">Outstanding Expenses<\/td>\n<td width=\"132\">Rs 30,000<\/td>\n<\/tr>\n<tr>\n<td width=\"140\">Inventory<\/td>\n<td width=\"142\">Rs 1,00,000<\/td>\n<td width=\"142\">Creditors<\/td>\n<td width=\"132\">Rs 1,00,000<\/td>\n<\/tr>\n<tr>\n<td width=\"140\">Current Liquid Asset<\/td>\n<td width=\"142\">Rs 4,30,000<\/td>\n<td width=\"142\">Total Current Liabilities<\/td>\n<td width=\"132\">Rs 3,00,000<\/td>\n<\/tr>\n<tr>\n<td width=\"140\"><strong>Absolute Liquidity Ratio<\/strong><\/td>\n<td colspan=\"3\" width=\"416\">(Rs 1,65,000 +Rs 75,000)\/ Rs 3,00,000<\/p>\n<p>= Rs 2,40,000\/ Rs 3,00,000<\/p>\n<p>= 0.8<\/td>\n<\/tr>\n<\/thead>\n<\/table>\n<h3><strong>5. Basic Defense Ratio<\/strong><\/h3>\n<p>The Basic Defense Ratio computes the number of days a company counterbalances money expenses without the help of supplementary financing from other fount.<\/p>\n<h4><strong>Example <\/strong><\/h4>\n<table width=\"319\">\n<thead>\n<tr>\n<td width=\"177\"><strong>Liquid Assets Particulars<\/strong><\/td>\n<td width=\"142\"><strong>Amount in Crore<\/strong><\/td>\n<\/tr>\n<tr>\n<td width=\"177\">Cash and Equivalent<\/td>\n<td width=\"142\">Rs 1,05,000<\/td>\n<\/tr>\n<tr>\n<td width=\"177\">Accounts Receivable<\/td>\n<td width=\"142\">Rs 80,000<\/td>\n<\/tr>\n<tr>\n<td width=\"177\">Marketable Securities<\/td>\n<td width=\"142\">Rs 55,000<\/td>\n<\/tr>\n<tr>\n<td width=\"177\">Current Liquid Assets<\/td>\n<td width=\"142\">2,40,000<\/td>\n<\/tr>\n<tr>\n<td width=\"177\"><strong>Daily Operational Expenses Particulars<\/strong><\/td>\n<td width=\"142\"><strong>Amount<\/strong><\/td>\n<\/tr>\n<tr>\n<td width=\"177\">Annual Operating Cost<\/td>\n<td width=\"142\">Rs 5,00,000<\/td>\n<\/tr>\n<tr>\n<td width=\"177\">Non-cash Expenses<\/td>\n<td width=\"142\">Rs 70,000<\/td>\n<\/tr>\n<tr>\n<td width=\"177\">Daily Operational Expenses<\/td>\n<td width=\"142\">Rs 4,30,000\/365<\/p>\n<p>= 1178<\/td>\n<\/tr>\n<tr>\n<td width=\"177\"><strong>Basic Defense Ratio<\/strong><\/td>\n<td width=\"142\">Rs 2,40,000\/ 1178<\/p>\n<p>= 203<\/td>\n<\/tr>\n<\/thead>\n<\/table>\n<h3><strong>6. Basic Liquidity Ratio<\/strong><\/h3>\n<p>Apart from all the above stated liquid ratios, Basic Liquid Ratio is not based on the company\u2019s financial status. But it\u2019s an individual financial ratio which indicates a schedule for how far a family can finance its requirement with its liquid assets. However, monetary backup is advisable for a minimum of three months.<\/p>\n<p style=\"text-align: center;\"><a href=\"https:\/\/entri.sng.link\/Dcofz\/mirx\/94jw\" target=\"_blank\" rel=\"noopener\"><strong>Download the Entri App For video lessons on Stock Marketing!<\/strong><\/a><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Liquid_Ratio_Formula\"><\/span><strong>Liquid Ratio Formula<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Check out the below given table for different liquid ratio formula;<\/p>\n<table width=\"518\">\n<thead>\n<tr>\n<td width=\"130\"><strong>Liquidity<\/strong><\/td>\n<td width=\"189\"><strong>Formula<\/strong><\/td>\n<td width=\"198\"><strong>Details<\/strong><\/td>\n<\/tr>\n<tr>\n<td width=\"130\">Current Ratio<\/td>\n<td width=\"189\">Current Assets \/ Current Liability<\/p>\n<p>&nbsp;<\/td>\n<td width=\"198\">Where;<\/p>\n<p>\u25aa\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Current Assets:-\u00a0 Debtor, Cash, Stock, Cash and Banks, Advance and Loans, Receivables and other current assets.<\/p>\n<p>\u25aa\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Current Liability:- Short-term loan, Bank Overdraft, Outstanding Expenses, Creditor and other current liabilities.<\/p>\n<p>&nbsp;<\/td>\n<\/tr>\n<tr>\n<td width=\"130\">Quick Ratio\/ Acid Test Ratio<\/td>\n<td width=\"189\">Quick Ratio = Quick Assets \/ Current Liability<\/p>\n<p>&nbsp;<\/td>\n<td width=\"198\">Where;<\/p>\n<p>\u25aa\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Quick Assets = Current Assets \u2013 Inventory \u2013 Prepaid Expense<\/p>\n<p>&nbsp;<\/td>\n<\/tr>\n<tr>\n<td width=\"130\">Cash Ratio<\/td>\n<td width=\"189\">Cash Ratio = Cash + Equivalent \/ Current Liabilities<\/p>\n<p>&nbsp;<\/td>\n<td width=\"198\">&#8211;<\/td>\n<\/tr>\n<tr>\n<td width=\"130\">Absolute Liquid Ratio<\/td>\n<td width=\"189\">Absolute Liquid Ratio = (Cash + Marketable Securities)\/ Current Liability<\/p>\n<p>&nbsp;<\/td>\n<td width=\"198\">&#8211;<\/td>\n<\/tr>\n<tr>\n<td width=\"130\">Basic Defense Ratio<\/td>\n<td width=\"189\">Basic Defense Ratio = (Current assets) \/ (Daily Operating expenses)<\/td>\n<td width=\"198\">Where;<\/p>\n<p>\u25aa\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Current assets = Marketable Securities + Cash and Equivalent + Receivables<\/p>\n<p>\u25aa\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Daily Operational Expense = (Annual Operational Costs \u2013 Non-cash Expenses) \/ 365<\/p>\n<p>&nbsp;<\/td>\n<\/tr>\n<tr>\n<td width=\"130\">Basic Liquidity Ratio<\/td>\n<td width=\"189\">Basic Liquidity Ratio = Monetary assets \/ Monthly Expenses<\/td>\n<td width=\"198\">&nbsp;<\/p>\n<p>&#8211;<\/p>\n<p>&nbsp;<\/td>\n<\/tr>\n<\/thead>\n<\/table>\n<p>Any company with better liquidity ratios has more ability to clear debt on the right period, meanwhile companies with poor liquidity struggles to do so. A relative liquidity ratio weighs up liquidity of one firm with the other of the same industry with almost identical working cycles and business. Hope the article \u2018Liquidity Ratio: Definition, Type, Formula, Examples\u2019 was informative for the readers.<\/p>\n<p style=\"text-align: center;\"><a href=\"https:\/\/entri.sng.link\/Dcofz\/mirx\/94jw\" target=\"_blank\" rel=\"noopener\"><strong>Enroll for Stock Marketing Course! Download Entri App!<\/strong><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>\u2018Liquidity\u2019 has a big role in business which is essential in a business to fulfill its short period commitment. In other words \u2018Liquidity Ratio\u2019 defines a company\u2019s potential to repay short-time creditors out of its whole cash. It\u2019s the outcome of parting the total cash by short-time borrowings, which denotes the no. of times short [&hellip;]<\/p>\n","protected":false},"author":108,"featured_media":25528561,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[802,1841,558],"tags":[],"class_list":["post-25528559","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-articles","category-entri-skilling","category-general-knowledge"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.6 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Liquidity Ratios: Definition, Type, Formula, Examples - Entri Blog<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/entri.app\/blog\/liquidity-ratios-definition-type-formula-examples\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Liquidity Ratios: Definition, Type, Formula, Examples - Entri Blog\" \/>\n<meta property=\"og:description\" content=\"\u2018Liquidity\u2019 has a big role in business which is essential in a business to fulfill its short period commitment. 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In other words \u2018Liquidity Ratio\u2019 defines a company\u2019s potential to repay short-time creditors out of its whole cash. 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