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Liquidity Ratios

Liquidity is a measure of a business' ability to meet day-to-day expenditure. Both low liquidity and high liquidity can be problematic - though low liquidity can threaten the business as a going concern.

Current Ratio

The Current Ratio is the ratio between a business' current assets and current liabilities. The ideal range for the current ratio is between \(1\) and \(2\).

\[ Current\;Ratio = \frac{Current\;Assets}{Current\;Liabilities} \]

Acid Test

The Acid Test is the ratio between a business' current assets less inventory and current liabilities. It measures a business' ability to meet its current liabilities without selling inventory (which can be difficult, or slow to sell). The ideal range for the acid test is around \(1\).

\[ Acid\;Test = \frac{Current\;Assets - Inventory}{Current\;Liabilities} \]
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