liquidity ratios

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  • liquidity ratios
    • how easy a business can pay off its current liabilities
    • current ratio-working capital ratio
      • current ratio=current assets/current liabilities.
      • ideally the figure should be around 1.5 showing it can pay bills easily
        • if it is below 1 the firm owes more than it has
        • if the number is above 2 the firm has too much money and should invest more into the business
      • assumes you will be able to turn stock into cash
    • acid test ratio-liquid capital ratio
      • acid test ratio=(current assets-stock)/current liabilities
      • if you have a figure much above 1 you have too much cash lying about so you should invest it.
      • below 1 youre in trouble
      • assumes you wont be able to turn stock into cash


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