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Achieve a current ratio above 1:1 and as close to 2:1 as possible.
The higher the Quick ratio, the higher the level of liquidity for your business.
The optimal quick ratio is 1:1 or higher, which means that current liabilities can be met from current assets without the need to sell inventory.
I absolutely agree with the above given answer .
Liquidity ratio is nothing but current assets/current liabilities. Higher the ratio, higher the liquidity position. In general for manufacturing companies minimum indicative level of current ratio is 1.33. It represents current assets worth of Rs.100.00/- is financed by current liabilities of Rs.75/- and long term funds of Rs.25.00/-. So that the company can smoothly turnaround its current assets. By maintaining minimum current ratio of 1.33, 25% of its current assets is financed with long term funds. So that the company will be having some cushion in turnaround its current assets to repay its pressing liabilities. One fundamental principle in financial management is short term funds should not be utilised for long term purpose. However, the minimum indicative level varies from one industry to another. Hence there is no bench mark level for current ratio.
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The current ratio is the ratio of current assets to current liabilities. It is sometimes suggested that there is an 'ideal' current ratio of two to one.
This is not necessary true and in some industries, much lower current ratios are normal. It is important to assess the liquidity ratios by considering:
* Changes in the ratio over time
* The liquidity ratios of other companies in the same period
* The industry average ratios
Liquidity should be monitored by looking at changes in the ratio over time.
The quick ratio or acid test ratio is the ratio of current assets excluding inventory.
Also here it is suggested that there is an ideal quick ratio of one to one.
This also is not necessary true in some industries, much lower quick ratios are normal. As indicated earlier,it is important to assess liquidity by looking at changes in the ratio over time, and comparisons with other companies and the industry norm.
Current ratio
Current assets / liabilities traded
Standard ratio 1: 2
Rapid Current Ratio
(Current assets - inventory) / liabilities traded
Standard ratio of 1: 1
Cash ratio
Cash and cash equivalents / commitments traded
Standard ratio of 1: 1 or a little less
Working capital
Current assets - current liabilities
Indicator of management efficiency
The cash coverage
(Current assets - inventory) / average daily operating costs
For the monitoring period required for funding
Self-funding period
(Liquid assets - current liabilities) average daily operating costs
More than the previous reserve ratio
Thank you all. You have provided excellent answers. In fact Liquidity ratio as you told
=Current assets/Current Liabilities. The ideal number or standard is vary from a filed of business to another field of business. For example, in most of the fields of business a percentage of 2/1 could be a good indicator that every due amount of 1 pound, will have 2 pounds to pay from our current assets. However less than this number means lack a or a financial risk. But at the same time a bigger number more than 2/1 means that the cash is not managed well in business and the company management is not professional enough and as a result could have problems in the future due to bad profitability.
Another important issue as we said at the beginning.some of the industries could need higher numbers in liquidity and 2/1 liquidity , or 1/1 as a Quick ratio (CA-Inventory/CL) could be very weak indicator. These industries like Banking for example and other cash business units. Thank you all
: frank mwansa has given a good answer of your question
