Ratio Analysis - Classification of ratios and Liquidity Ratio

Ratio Analysis – Classification of ratios and Liquidity Ratio

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20, Aug 2014

In our previous blog post we discussed ratio analysis. In this blog post we will explain classification of ratios and discuss Liquidity ratio.

Ratios are classified on the basis of the parties of their usage. Accounting ratios are used to indicate the financial position of a firm. Ratios are classified:

On the basis of Balance Sheet
On the basis of Profit & Loss Account
On the basis of Mixed Statement

The above classification further grouped into:

Liquidity Ratio
Profitability ratio
Turnover Ratio
Solvency Ratio

Ratio Analysis - Classification of ratios and Liquidity Ratio

LIQUIDITY RATIOS

The scope to which there is quick convertibility of assets in to money, for the purpose of paying obligation of short-term nature can be termed as liquidity. Apropos to obtaining an indication of a firm’s ability to meet its current liabilities, the utility of the liquidity ratios is instrumental. As a flipside, however, it does not bring to the light, the effectiveness of the optimal management of cash resources. It is also termed as Short-Term Solvency Ratios. To measure the liquidity of a firm, the following Liquidity ratios are commonly used:

1) Current Ratio:

The relationship between current assets and current liabilities is established by Current Ratios. . It attempts to measure the ability of a firm to meet its current obligations. Current assets and current liabilities comprise of two pivotal components of this ratio. Assets that can be easily converted into cash, within the time frame of less than a year, can be termed as current assets. While, conversely, current liabilities encompass those liabilities which can be paid off with in a year.

Current Ratio = Current Assets / Current Liabilities

The ideal current ratio is 2: 1. It is a stark indication of the financial soundness of a business concern. When Current assets double the current liabilities, it is considered to be satisfactory. Higher value of current ratio indicates more liquid of the firm’s ability to pay its current obligation in time.

Advantages of Current Ratio:

It measures the liquidity of the firm
It represents the working capital position of a firm
It represents the liquidity of a company
It represents margin of safety
Its tells us the short term solvency of a firm.

Disadvantages of Current Ratio:

Its accuracy can be deterred as, pertaining to different businesses, depending on a variant of factors
Over-valuation of stock also contributes to its tipping accuracy
It measures the firm liquidity on the basis of quantity and not quality, which comes across as a crude method.

2) Quick Ratio or Acid Test Ratio:

The acid test ratio is a stringent and meticulous test of a firm’s ability to pay its short-term obligations ‘as and when they are due. Quick assets and current liabilities can be associated with the help of Quick Ratio.

The ideal Quick Ratio is 1: 1 and is considered to be appropriate. High Acid Test Ratio is an accurate indication that the firm has relatively better financial position and adequacy to meet its current obligation in time.

Quick Ratio = Liquid Asset (Current Assets ‘“ Stock & Prepaid Expenses) / Current Liabilities

Advantages of Quick Ratio:

It tells us the liquidity position of a firm
It is used to remove the errors of current ratio
It is used as supplementary to the current ratio.

3. Absolute Liquid Ratio:

The relationship between the absolute liquid assets and current liabilities is established by this ratio.
Absolute Liquid Assets take into account cash in hand, cash at bank, and marketable securities or temporary investments. The most favourable and optimum value for this ratio should be 1: 2. It indicates the adequacy of the 50% worth absolute liquid assets to pay the 100% worth current liabilities in time. If the ratio is relatively lower than one, it represents the company’s day-to-day cash management in a poor light. If the ratio is considerably more than one, the absolute liquid ratio represents enough funds in the form of cash in order to meet its short-term obligations in time.

Absolute Liquid Ratio = Absolute Liquid Ratio / Current Liabilities

So that were the 3 important Liquidity ratios that one must know in order to find out the short term solvency position of a company. In our next blog we shall learn about profitability ratio.

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26, Apr 2022

How to Calculate GST (Goods and Services Tax)?

Hey there! So good to have you back again. Are you also keen on learning how to calculate GST? If Read More

25, Apr 2022

Why are Financial Markets Regulated?

Hey there! Welcome back again. Are you also curious and wondering why are financial markets regulated and why are they Read More

22, Apr 2022

Does an Accountant Need an MBA?

Hey there! Welcome back again. Are you the one among others who is confused and want to know whether an Read More

21, Apr 2022

Why is ACCA Not Recognized in The USA?

Hey there! Welcome back again. Have you ever wondered why is the ACCA course not recognized in the USA, but US CPA Read More

20, Apr 2022

Is the US CMA Course Appropriate for Working Professionals?

Hey there! Are you a working professional and want to pursue the US CMA course simultaneously while working full time? If yes, Read More

19, Apr 2022

What is a Derivative?

Derivatives are financial contracts that derive their value from the performance of an underlying asset, or group of assets, or Read More

18, Apr 2022

What is Derivative Market?

Did you know that derivatives are also considered advanced investing? Well, derivatives can be called secondary securities whose value is Read More

16, Apr 2022

Types of Acquisitions

Hey there! Welcome back once again. Have you ever wondered why do many acquisitions succeed just as many who fail? Read More

15, Apr 2022

Types of Mergers

Hey there! Welcome back again. In the previous blog, we discussed what are mergers and acquisitions. In this blog, we Read More

14, Apr 2022

What are Mergers and Acquisition?

Hey there! Welcome back again. Mergers and Acquisition sound quite familiar right? But ever wondered why are Mergers and Acquisitions Read More

12, Apr 2022

Do Indian Companies Hire CFA’s?

Hey there! So good to have you back again. Are you planning to do CFA and wondering whether Indian companies Read More

11, Apr 2022

What Should I Study, US CMA or Digital Marketing?

Hey there! Welcome back again. Are you confused and wondering which course to study, US CMA or Digital Marketing? Well, Read More

08, Apr 2022

Types or Methods of Business Valuation

Hey there, Welcome back again. Let us understand what business valuation is and its different methods. Let us get started. Read More

07, Apr 2022

What is GST? What Are The Career Opportunities in GST (Tax domain)?

The tax system in India has undergone tremendous changes since the introduction of GST. GST stands for Goods and Services Read More

16, Feb 2022

How to Manage Risks in a Business?

Hey there! Welcome back again. Do you know one of the most critical factors to be kept in mind while Read More

15, Feb 2022

How to Work On a Digital Marketing Project for Practice?

Hey there! Welcome back to another blog. We will be discussing the tips on how to work on a digital Read More

13, Feb 2022

What is Digital Marketing? What is the objective?

Hey there! Ever wondered what is the main objective behind practicing digital marketing techniques? Digital marketing has now become a Read More

12, Feb 2022

Is CA the only optimal career option for commerce graduates?

Are you also thinking about what is next after B.Com? Is pursuing CA the only option for commerce graduates? Let Read More

11, Feb 2022

All about the US CPA course

Topic: Is CPA preferable after CA? Are you a qualified Chartered Accountant and wondering what is next after CA? If Read More

10, Feb 2022

In your opinion, what makes a good Financial Model?

Are you aware that a good financial model can help multiple start-ups and small businesses? With this, now let us Read More

09, Feb 2022

What is Business Valuation?

Business valuation is the general process or result of determining the economic value of a company or a whole business or Read More

08, Feb 2022

Does CFA has any scope in India?

Is it worth becoming a CFA (Chartered Financial Analyst)? Is it worth investing nearly three years, spending about 900 study hours, and Read More

07, Feb 2022

Career Advice: Is doing the ACCA over a CA a better option?

Hey there! So good to have you back again. This blog is mainly for those who are confused regarding which Read More

04, Feb 2022

Which is a Better Career Option, CFA or FRM?

Hey there! Welcome to another blog where we discuss which course is better, the CFA course or the FRM course? We will be Read More

02, Feb 2022

What is the procedure for enrolment for the CPA program for beginners?

Hey there! So good to have you back again. Well, if you are planning to pursue the CPA course then Read More

01, Feb 2022

How Do People Judge the Quality of Financial Modeling?

Hey there! Welcome back again. Are you also wondering what is Financial Modeling, that everyone in the finance industry keeps talking Read More

17, Jan 2022

What is the Reality of a Career in Digital Marketing?

Hey there! Welcome back again. Do you wish to get better clarity on what is the actual reality of a Read More

14, Jan 2022

Which is Better CMA or CIMA?

CMA and CIMA sound quite similar right? Are they the same? Are you also confused and wondering which one is Read More

13, Jan 2022

Is CFA in India Good for a Career?

Hey there! Welcome back again. Are you thinking about how good is the CFA as a career option in India? Let’s deep Read More

12, Jan 2022

I Desire to Get an ACCA Degree, but the Tuition is too Expensive. Why is the ACCA Course Expensive?

Hey there! So good to have you back again. Today, we will be answering the most frequent question which is, Read More

11, Jan 2022

Are There Any Job-Oriented Courses After Completing Graduation?

Hey there! Congratulations on completing your graduation. Are you now ready and excited to pursue job-oriented courses that will help you secure Read More

10, Jan 2022

Is Financial Modeling from EduPristine Worth It?

Hey there! Welcome back again. Let me begin by asking you a very simple question which is, did you know Read More

07, Jan 2022

Does Digital Marketing Have a Great Future Ahead?

Why Digital Marketing course is trending and has so much demand? What topics are covered under the Digital Marketing course syllabus? Is Digital Marketing Read More

06, Jan 2022

What are the Benefits of Pursuing FRM Course(GARP)?

You must have heard about the term FRM or Financial Risk Manager several times, but ever wondered what exactly is FRM, how Read More

05, Jan 2022

What is the Syllabus for CPA Course? Is it the Same as CA or Different?

Hello there! Welcome back again. Are your curious minds also wondering whether the syllabus for the US CPA course is similar to Read More

04, Jan 2022

What are The Top Skills a Commerce Student Must Have?

Hey there! So good to have you back again. Did you know companies are more inclined towards selecting candidates who Read More

03, Jan 2022

What are the Benefits of Learning Financial Modeling?

Do you ever wonder what does a Financial Modeler do? Some of you might also want to become a successful Read More

21, Oct 2021

What is the difference between ACCA and CPA?

Accounting is a field that has endless job opportunities. It is the backbone of an organization. Be it any industry, Read More

21, Sep 2021

5 Reasons why you should pursue the CPA course after CA

CPA course, also known as Certified Public Accountant (CPA), is a globally recognized designation and is the highest standard of Read More

21, Oct 2020

How Opting for Full-Time Level I CFA Course Gives You an Edge Over Others

Chartered Financial Analyst (CFA course) is one of the most in-demand certifications in the field of finance and provides lucrative Read More

22, Aug 2020

A Complete Guide on ACCA Course Eligibility, Duration, Registration, Fees, Etc.

Why the ACCA course? ACCA is a global professional accounting body offering the Chartered Certified Accountant qualification (ACCA) and is Read More

17, Aug 2020

CPA Exam Registrations and Scheduling in India

CPA Exam Registration CPA stands for Certified Public Accountant and is one of the major certification courses in the field Read More

18, May 2020

What is Soft Skill Training ?

What is Soft Skill Training With the evolution of the business and client servicing industry, soft skills have started gaining Read More

03, Oct 2019

What is Finance: Types of Finance and Financial Instruments?

Finance is a major and vast topic to cover. Accounting and Finance are often used together, and some even deem Read More

10, Sep 2019

All you want to know about Chartered Accountant (CA)

Here's what you need to get started with the Chartered Accountant (CA) course Chartered Accountant is an honorable designation that Read More

03, Jul 2019

Soft Skills For The Hard World

Soft Skills Training - Reality Check: Whether we'™re talking in a team meeting or presenting in front of an audience, Read More

26, May 2019

What is the Importance Of Relative Valuation

Relative Valuation Generally speaking, ‘valuation’ can be defined as the process for finding the ‘value’ of anything. In the world Read More

19, May 2019

Ratio Analysis – Ratios Formulae

Ratio analysis'”the foundation of fundamental analysis'”helps to gain a deeper insight into the financial health and the current and probable Read More

20, Apr 2019

Excel Tricks: Text Functions in Excel

How to use Text Functions in Excel Excel is mostly about the numerical data, but at times you can Read More

10, Apr 2019

Explore the Top 12 Opportunities Which Will Take Your Career to the Next Levet [2020 – 2021]]

While writing the last paper of your final B.Com exam, a plethora of thoughts go through your mind. A lot Read More

28, Oct 2018

Top 10 Accounting Firms

Over the years, the way of doing business has changed significantly. There are a number of factors which have contributed Read More

10, Oct 2018

Everything you want to know about the CMA certification

CMA Full Form: Certified Management Accountant (CMA) Going for the CMA certification is a great career move, especially when you Read More

06, Aug 2018

SAP certification – examination, eligibility and benefits

SAP certification help validate the expertise and experience of SAP partners, software users, customers and professionals who are looking to Read More

03, Aug 2018

Root Cause Analysis

As the name suggests, Root Cause Analysis deals with identifying the origin of a problem and finding a solution for Read More

26, Jun 2018

Principles and Fundamental Concepts of Basic accounting

Accounting is extremely popular as the language of business language. Through this language, it is easy to analyze the financial Read More

04, Jun 2018

Know how to understand and interpret cash flow statement

A cash flow statement is essential to any business as it can be the basis of budgeting by assessing the Read More

29, Mar 2018

ALL YOU WANT TO KNOW ABOUT SENSITIVITY ANALYSIS

The Crucial Role of Sensitivity Analysis: Hey there, so good to have you back again. Have you ever wondered how Read More

24, Mar 2018

ACCA Full Form

ACCA - Association of Chartered Certified Accountants The role of strategic academic guidance in the life of a student is Read More

25, Feb 2018

FINDING AND REMOVING DUPLICATES IN EXCEL

FINDING AND REMOVING DUPLICATES IN EXCEL Have you ever encountered a situation where you see a lot of duplicated data Read More

07, Feb 2018

Capital Budgeting: Techniques & Importance

In our last article, we talked about the Basics of Capital Budgeting, which covered the meaning, features and Capital Budgeting Read More

14, Jan 2018

Importance of Business Accounting for enterprises

Introduction: Importance of Accounting to your business The term Accounting is a very common one and we hear about the Read More

11, Jan 2018

Amalgamation Explained in detail

AMALGAMATION EXPLAINED IN DETAIL Understanding Amalgamation: Exploring the Dynamics of Corporate Unions Have you ever wondered what truly defines the Read More

08, Jan 2018

Working Capital Management

What is Working Capital Management? Traditionally, investors, creditors and bankers have considered working capital as a critical element to watch, Read More

30, Dec 2017

STATISTICAL FUNCTIONS IN EXCEL

STATISTICAL FUNCTIONS IN EXCEL People usually have love-hate relationship with statistics. When you get your formulas right you are in Read More

07, Dec 2017

Venture Capital

Unlocking the power of Venture Capital: Features, Financing Methods, and Opportunities Hey there, so good to have you back again! Read More

02, Dec 2017

Financial Reporting

In any industry, whether manufacturing or service, we have multiple departments, which function day in day out to achieve organizational Read More

09, Nov 2017

Cell References in Excel

While using excel, there may be times when you want to keep the values same while copying formulas. This can Read More

24, Sep 2017

Costing Methods & Important Cost Terms

Costs can be simply defined as the money or resources associated with a purchase / business transaction or any other Read More

25, Aug 2017

Balance sheet explained in detail

What is Balance Sheet? A balance sheet (also called the statement of financial position), can be defined as a statement Read More

15, Jul 2017

Cash Flow Statement

CASH IS KING;is a known fact, that it is the basis of any business. No bills, employees or for that Read More

08, Jul 2017

What are the career options after Mcom

Master of Commerce or M Com is a postgraduate Master Degree which specializes in commerce, accounting, management and economics related Read More

07, Jun 2017

WHAT IS STANDARD DEVIATION?

WHAT IS STANDARD DEVIATION? In finance and investment, understanding and managing risk is of paramount importance. Among the tools available Read More

21, Apr 2017

Know how effective is CMA course compared to MBA in providing a dream job

There are various industries and sectors out there where you can grow and enhance your career. Management, Accounting, Finance, Engineering, Read More

02, Mar 2017

ACCA EXAM STRUCTURE AND PATTERN

ACCA EXAM STRUCTURE AND PATTERN Understanding the ACCA exam structure and pattern is essential for individuals aspiring to pursue a Read More

22, Feb 2017

Comparison of CPA course with other courses

The Accounting industry offers you various opportunities to learn via various courses. You can choose which one suits your academic Read More

08, Feb 2017

Advantages and Application Process of FRM

FRM (Financial Risk Manager) Certification gives you a distinctive edge from the other risk management professionals operating in the Finance Read More

03, Jan 2017

An insight into OTC Derivatives

What is Derivatives? Derivatives are defined as the type of security in which the price of the security depends/is derived Read More

03, Oct 2016

CPA Course Syllabus – Topics and Importance

A CPA requires a broad spectrum of knowledge and proficiency in it. The purpose of CPA exam syllabus is to Read More

07, Jun 2016

CFA® Study Planner

Most of the CFA® pursuers believe that CFA® Program tests are very difficult and arduous but that is not the Read More

03, Jun 2016

CPA Course details, application fees and benefits of doing it

A Certified Public Accountant (CPA) is the highest standard of competence in the field of Accountancy across the globe. The Read More

31, May 2016

All Important About CFA® LEVEL 1 Syllabus

CFA® charter is one of the most exalted credentials of those who work in the financial sector or who make Read More

18, Jan 2016

All about Portfolio Management

What is a Portfolio? A portfolio can be defined as different investments tools namely stocks, shares, mutual funds, bonds, cash Read More

25, Nov 2015

Cost Management: Meaning, Techniques & Advantages

What is Cost? Cost is defined as the monetary valuation of effort, material, resources, time consumed, risk and opportunity forgone Read More

19, Oct 2015

How to get into Big 4 Accounting Firms?

We all have some career objectives and aspirations. For higher studies like MBA, CA, CPA, ACCA, CFA etc. one has Read More

13, Oct 2015

FRM Question Bank

For every exam, time management is very important and everyone wants a precise course content in a prioritized manner along Read More

29, Sep 2015

Top 10 Companies that hire CFA® Charterholders

A lot of hardwork and investment is required to prefix the words CFA® Program before your name and time and Read More

18, Aug 2015

Income Statement in detail

WHAT IS INCOME STATEMENT? The income statement is one of the important primary financial statements provided by organizations. It presents Read More

12, Aug 2015

KPIs for Business Analysts

A business analyst's role in an IT project is to ensure that all requirements of the client are captured and Read More

03, Aug 2015

Annual Report

What is an Annual Report: The single source of getting information about any company whether it is the past or Read More

01, Jul 2015

Capital Budgeting

WHAT IS CAPITAL BUDGETING? Capital budgeting is a company’s formal process used for evaluating potential expenditures or investments that are Read More

16, Jun 2015

Mergers and Acquisitions

What is Mergers & Acquisitions? Mergers and acquisitions (M&A) are defined as consolidation of companies. Differentiating the two terms, Mergers Read More

15, Jun 2015

Detecting Multicollinearity

" In my previous blog “ How to deal with Multicollinearity ”, I theoretically discussed about definition of multicollinearity and Read More

26, May 2015

ANALYSIS OF FINANCIAL STATEMENT OF A COMPANY

ANALYSIS OF FINANCIAL STATEMENT OF A COMPANY One of the major aspects of making a sound investment decision is analyzing Read More

24, Mar 2015

8 Excel functions that every Data Analyst must know

Are you a data analyst or looking for a career as a data analyst??? Well then, today's article is dedicated Read More

24, Mar 2015

Duckworth-Lewis Method

Duckworth-Lewis method(D/L method) is a mathematical function defined to set and calculate the target score for the team batting second Read More

28, Feb 2015

6 Most Common Excel Errors

Hashtags look cool when seen on Twitter or Facebook but as soon as they start appearing in Excel sheet, you Read More

23, Feb 2015

RULE PRECEDENCE IN CONDITIONAL FORMATTING

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10, Dec 2014

Types of Investment Banking jobs

Investment banking is one of the most attractive industry to work in. not only for people with formal education in Read More

29, Aug 2014

FRM Part 1 syllabus

Shut your doors, drop the drapes on your windows and don't bother looking at the clock because it's always the Read More

20, Aug 2014

Ratio Analysis – Introduction

Introduction The term 'ratio analysis'refers to the analysis of the financial statements in conjunction with the interpretations of financial results Read More

20, Aug 2014

Ratio Analysis – Classification of ratios and Liquidity Ratio

In our previous blog post we discussed ratio analysis. In this blog post we will explain classification of ratios and Read More

23, May 2014

Bootstrapping Solution

What is the Bootstrapping method? Bootstrapping is a method for constructing a zero-coupon yield curve from the prices of a Read More

13, Nov 2013

Dell’s Leveraged Buyout: A Real-life Case Study

Acquisitions Acquisitions or takeovers are a transaction or process wherein one company (commonly called as acquirer) or an investor acquires Read More

08, Aug 2013

CASH FLOW STATEMENT: LEARN TO CREATE CASH FLOW STATEMENT TEMPLATE IN EXCEL

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07, Feb 2010

CFA® Program from ICFAI (India) Vs CFA® Program from CFAI (US)

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