What is Liquidity Analysis

This Liquidity Analysis is a description of the cash position and the ability of a company to pay off or pay off debt obligations according to the agreed maturity .

Basically, this Liquidity Analysis is the result of the distribution of cash and other current assets with short-term loans and current liabilities. This Liquidity Analysis shows how many times short-term debt obligations can be covered by cash and other current assets.

Liquidity Ratio consists of a current ratio, a quick ratio, and a cash ratio. Below we will explain how to calculate liquidity ratios.

Types of Liquidity

  1. Current Ration

    This ratio is to assess the adequacy of the company’s current assets to pay off short-term liabilities or current debt used in accounting calculations according to the type of financial statement . If the ratio of current assets to current debt is high, the company’s ability is also high to pay off its current debt. If the current ratio shows a ratio of 1: 1 or 100%, it means that current assets can pay off short-term liabilities.

  2. Quick Ration

    Quick Ratio is used to determine the company’s ability to pay short-term liabilities using current assets, but without inventory because inventory takes longer to convert into money compared to other assets. Quick assets include receivables and securities. The greater the value of the ratio, the better the company’s condition. If the ratio is 1: 1 or 100% then this is good company liquidity . if there is a liquidity problem then the company will be easy to convert assets into money to pay obligations (debt).

  3. Cash Ratio

    Cash Ratio is used to measure the availability of cash to pay off short-term obligations (debt). Cash can be in the form of a checking account. If the ratio of 1: 1 or 100% means the ratio of cash or cash equivalents to debt will be better so that the company can pay off the debt according to maturity or before maturity.

  4. Cash Turnover Ration Cash Turnover

    Ratio displays the ratio of net sales to net working capital. Net working capital in the form of all components of current assets minus total current debt. This ratio is also to find out how much sales for working capital the company has.

  5. Working Capital to Total Asset Ratio

    This ratio is used to assess liquidity by calculating total assets and working capital positions. The nature of accounting is very influential on this type of ratio.

 

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