Liquidity ratios - Introduction

Financial liquidity is the basic parameter assessing the quality of current operating activities of the company and it defines the ability of covering the currently due (short-term) liabilities on time. Company's financial liquidity is related to the possession of the sufficient level of so called liquid assets, which are the assets that can be exchanged for cash in relatively short time and without excessive transactional cost. Financial liquidity analysis is based on the examination of the ratios relating selected liquid assets to current (short-term) liabilities. These ratios are based on the assumption that the elements of current assets can be encashed to cover the current (short-term) liabilities.

The group of financial liquidity ratios includes:

• Current ratio,
• Adjusted current ratio,
• Quick ratio (acid test),
• Adjusted quick ratio,
• Cash ratio,
• Adjusted cash ratio,
• Immediately due liabilities ratio,
• Net working capital,
• Net working capital to current assets.