Financial Performance - Liquidity Ratios

The speaker provides an overview of liquidity ratios.  They determine how agile a company is as far as cash flow is concerned.  She discusses the current ratio and quick ratio and talks through each ratio in detail.

The current ratio is current assets divided by current liabilities.  She mentions that this ratio describes the cash position of a company.  This ratio should be at least 1 and preferably 2.

The quick ratio, or acid/test ratio, is (current assets minus inventory minus prepaid expenses)/current liabilities.  This ratio describes the short term cash position and is very similar to the current ratio; however, excludes some of the more less liquid components.  It is a more accurate measure of te firms liquidity.