236. Liquidity - Current Ratios and Quick Ratios | Financial Literacy for Business Series

The Winning Momentum Podcast with Scott Sinclair

Welcome to our Financial Literacy for Business Series!
In this episode, we dive into the concept of liquidity and explore two key ratios: the current ratio and the quick ratio.
What is Liquidity?
Liquidity refers to a company's ability to meet its short-term financial obligations using its most liquid assets. These are typically cash or assets that can be quickly converted to cash without significant loss of value. High liquidity means a company can easily cover its debts and operational expenses, whereas low liquidity suggests potential difficulties in meeting short-term liabilities, potentially affecting the company's financial stability.
Liquidity ratios are crucial for various stakeholders:
• Investors: Assess the company's financial health and ability to meet short-term obligations, influencing investment decisions.
• Creditors and Lenders: Evaluate the company's ability to repay short-term debt, aiding in credit and loan decisions.
• Management: Monitor and manage liquidity to ensure sufficient assets to cover liabilities and avoid cash flow issues.
• Analysts: Compare companies within the same industry and provide recommendations based on liquidity and financial stability.
Key Liquidity Ratios
1. Current Ratio: The current ratio measures a company's ability to pay off its short-term liabilities with its short-term assets. It's calculated as: Current Ratio = Current Assets / Current Liabilities. A current ratio between 1.5 and 3 is considered healthy.
2. Quick Ratio (Acid-Test Ratio): The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets, excluding inventories. It's calculated as: Quick Ratio = (Current Assets−Inventories) / Current Liabilities
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