2.3.2 Liquidity

    Cards (24)

    • Liquidity in business finance refers to a company's ability to cover its short-term obligations as they become due.obligations
    • Inadequate liquidity can lead to financial distress and damage a company's credit rating.
    • Inadequate liquidity can result in late payments and penalties
    • Match the liquidity ratio with its formula:
      Current Ratio ↔️ Current AssetsCurrent Liabilities\frac{\text{Current Assets}}{\text{Current Liabilities}}
      Quick Ratio ↔️ Current Assets - InventoryCurrent Liabilities\frac{\text{Current Assets - Inventory}}{\text{Current Liabilities}}
      Cash Ratio ↔️ Cash + Marketable SecuritiesCurrent Liabilities\frac{\text{Cash + Marketable Securities}}{\text{Current Liabilities}}
    • Maintaining adequate liquidity is crucial for a company's operational stability and credit rating.
    • The current ratio is calculated as \frac{\text{Current Assets}}{\text{Current Liabilities}}</latex>. A ratio of 2:1 indicates the company has twice as many assets as liabilities
    • Liquidity ratios help analysts understand whether a company has enough liquid assets to cover its immediate liabilities.
    • The current ratio measures the ability to cover current liabilities with current assets.
    • A high current ratio indicates strong liquidity.
    • What does the quick ratio measure?
      Ability to cover liabilities with quick assets
    • The cash ratio measures the ability to cover current liabilities with cash and marketable securities.
    • A low cash ratio may signal financial distress.
    • Match the liquidity ratio with its formula:
      Current Ratio ↔️ Current AssetsCurrent Liabilities\frac{\text{Current Assets}}{\text{Current Liabilities}}
      Quick Ratio ↔️ Current Assets - InventoryCurrent Liabilities\frac{\text{Current Assets - Inventory}}{\text{Current Liabilities}}
      Cash Ratio ↔️ Cash + Marketable SecuritiesCurrent Liabilities\frac{\text{Cash + Marketable Securities}}{\text{Current Liabilities}}
    • What does liquidity in business finance measure?
      Ability to cover short-term obligations
    • Maintaining adequate liquidity ensures the company can pay its short-term debts on time.
    • Adequate liquidity improves a company's creditworthiness.
    • What are the three common liquidity ratios?
      Current Ratio, Quick Ratio, Cash Ratio
    • A current ratio of 1.5 to 2 is generally considered healthy.
    • What does a current ratio greater than 2:1 suggest?
      Strong short-term coverage
    • A quick ratio greater than 1:1 indicates robust liquid assets.
    • A cash ratio greater than 0.5:1 indicates immediate debt solvency.
    • What are examples of external factors affecting liquidity?
      Market conditions and interest rates
    • Internal factors affecting liquidity include operating cash flow and working capital management.
    • Strategies for improving liquidity
      1️⃣ Enhance cash flow management
      2️⃣ Improve working capital efficiency
      3️⃣ Negotiate better terms with suppliers
      4️⃣ Secure lines of credit
      5️⃣ Divest non-core assets