Liquidity ratio

Liquidity ratio may refer to:

  • Reserve requirement, a bank regulation that sets the minimum reserves each bank must hold.
  • Quick ratio (also known as an acid test) or current ratio, accounting ratios used to determine the liquidity of a business entity

In accounting, the liquidity ratio expresses a company's ability to repay short-term creditors out of its total cash. It is the result of dividing the total cash by short-term borrowings. It shows the number of times short-term liabilities are covered by cash. If the value is greater than 1.00, it means fully covered.

The formula is the following:

LR = liquid assets / short-term liabilities

Liquidity ratios measure how quickly assets can be turned into cash in order to pay the company's short-term obligations. Following ratios can be considered to measure the liquidity of a firm.

  1. Working Capital
  2. Working Capital Ratio
  3. Current Ratio
  4. Quick Ratio
  5. Absolute Liquid Ratio

See also
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