LIQUIDITY RATIO measures the ability of a company to meet its short-term finance obligations.
Current Ratio=current assets/ current liabilities.
A ratio of 2 is healthy as to ensure LIQUIDITY.
The greater the ratio, the greater the company's ability to meet its short term debt.
However, a current ratio of greater than 4 may imply that company is underutilising its assets.
Acid test ratio=( Current assets-inventories)/current liabilities.
It's a better reflection of company's liquidity than the current ratio.
SOLVENCY RATIO is the ability of company to service its long term debt obligation.
Debt-to-assets ratio=total liabilities/total assets=total liabilities/(total liabilities + shareholder equity).
Low ratio indicates that the owners are providing more funds for the business than the creditors.Hence there is a lower risk of bad debts as company will be able to pay its debts.
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