What are liquidity ratios? Why are they important? How might you use liquidity ratios when making your personal investment decisions?
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Liquidity ratios are ratios that show the relationship of a firm's cash and other current assets to its current liabilities (Brigham & Houston, 2007). Ratios that are included in this liquidity category are current ratio and quick ration or acid test ratio. Current ratio is calculated by dividing current assets by current liabilities. It indicates the extent to which current liabilities are covered by those assets expected to be converted to cash in the near future. Quick (Acid Test) ratio is ...
Liquidity ratios are examined. The importance and how to use them in personal investment decisions is given.