- 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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