Whenever matchless is gazing for an investing in a confederacy one must gaze into the runnyity of a ships company because if company has not adequate liquidness then it calls lot of commove like not able to wage money to creditors, remune symmetryns to employees, suppliers and whitethorn even lead to bankruptcy of company.
Liquidity is like a human body without blood.
So what does liquidity means, well in simple terms it means the ability to change an addition to cash degenerately is called liquidity or companies ability to pay its amount outstanding in short term.
There be two proportions which directly measure the liquidity they are cognise as received ratio and quick ratio.
Current ratio: It is specify as current property or current assets /current liabilities.
Current assets = Cash + Viable securities + Debtors +Inventories + Pre paid direct cost.
Current liabilities =Loans + Advances + Trade Creditors + Accrued expenses +Provisions.
An idyllic current ratio is 2:1.Higher the current ratio soften it is, but in interpreting the current ratio care should be taken in looking into the composition of current assets. A company which has a huge amount of cash is more liquid then a company having elevated inventories though some(prenominal) the companies current ratio will be same. To overcome this other(a) ratio known as quick ratio is used.
let us see what we mean by the quick ratio.
ready(a) Ratio (also known as acid test ratio): It is defined as quick assets/current liabilities.
Quick assets = All things as Current assets - Inventories - Pre Paid Expenses
Current liabilities = Remains the same.
An ideal quick ratio should be 1:1 or better however it varies by industry.
There are other liquidity ratios as well like Receivables Turnover, Average Collection Period, blood line Turnover but the above the above two depict are the most important because by looking at the two one can tell the whether company is liquid enough or not.
Profitability
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