Liquidity ratios
Liquidity ratios measure the ability of a business to turn its assets into cash.
| Ratio | Formula | Notes |
|---|---|---|
| Current ratio | Current assets : Current liabilities | The ability to meet current liabilities when they fall due. Improve: invest more, obtain long-term loans. |
| Liquid (acid test) ratio | (Current assets − Inventory) : Current liabilities | Compares assets that are (or quickly become) cash with the liabilities due for repayment. |
| Rate of inventory turnover | Cost of sales ÷ Average inventory | How many times a year the business sells and replaces its inventory. Improve: boost sales with discounts or new marketing. |
| Trade receivables turnover | Trade receivables ÷ Sales × 365 (days) | The average time credit customers take to pay. Improve: better credit control, offer cash discounts. |
| Trade payables turnover | Trade payables ÷ Purchases × 365 (days) | The average time taken to pay credit suppliers. |