What will be the liquid ratio

The Liquid Ratio, also known as the Quick Ratio, measures a company’s ability to pay its short-term liabilities using its most liquid assets (i.e., assets that can be quickly converted into cash).

???? Formula:

Liquid Ratio (Quick Ratio)=Liquid AssetsCurrent Liabilities\text{Liquid Ratio (Quick Ratio)} = \frac{\text{Liquid Assets}}{\text{Current Liabilities}}Liquid Ratio (Quick Ratio)=Current LiabilitiesLiquid Assets?

? Liquid Assets include:

• Cash

• Bank balances

• Marketable securities

• Accounts receivable (Debtors)

Exclude: Inventory and prepaid expenses (because they are not easily convertible to cash).

???? Example:

Let’s say a company has:

• Cash: ?50,000

• Accounts Receivable: ?1,00,000

• Inventory: ?70,000

• Prepaid Expenses: ?10,000

• Current Liabilities: ?1,00,000

Then:

Liquid Assets=50,000+1,00,000=?1,50,000\text{Liquid Assets} = 50,000 + 1,00,000 = ?1,50,000Liquid Assets=50,000+1,00,000=?1,50,000 Quick Ratio=1,50,0001,00,000=1.5\text{Quick Ratio} = \frac{1,50,000}{1,00,000} = 1.5Quick Ratio=1,00,0001,50,000?=1.5

???? Ideal Quick Ratio

• Typically, 1:1 is considered safe. This means the company has ?1 in liquid assets for every ?1 in short-term liabilities.