Liquidity indicator types:
- Current ratio
- Quick ratio
- Cash ratio
- Interval measure
Current ratio is definitely one the most important liquidity ratios: it shows how many euros of current assets are available for each euro of current liabilities. If the value is less than 1, the firm may be insolvent and not able to cover its current liabilities from the cash realised from its current assets. It is an excellent measure of short-term liquidity. Current ratio is calculated as the current assets divided by the current liabilities.
Quick ratio is an improved version of the current ratio. It differentiates between assets based on their liquidity. Only the more liquid ones are included in the calculation: such as cash, marketable securities, and receivables. With the help of this indicator, one can examine whether the firm actually has enough liquid current assets to cover its current debts. Quick ratio is the fraction of the above mentioned liquid assets and the current liabilities.
In this measurement, only the most liquid assets are taken into account (generally speaking: cash and marketable securities).
Interval measure shows how long the firm could operate if it stopped receiving any revenues from one day to the other.