YOGYAKARTA - Liquidity Ratio is a financial metric used to measure a company's ability to meet its short-term obligations. This ratio is very important to assess whether a company has sufficient current assets to pay its maturing debts. By understanding the liquidity ratio, business actors can assess the financial health of a company more objectively.
In practice, the liquidity ratio is an analysis tool that helps investors, creditors, and management in making strategic decisions. This ratio is also used to monitor the company's cash flow to remain stable in carrying out daily operations. Therefore, companies need to maintain the liquidity ratio at an ideal figure.
To better understand it, see the definition of the liquidity ratio, types, and examples of calculations in the article below.
Liquidity Ratio IsQuoted from the Investopedia website, the liquidity ratio is a measure used to assess a company's ability to meet its short-term debt obligations. This type of ratio includes the current ratio, quick ratio, and cash ratio
In general, the higher the liquidity ratio, the more liquid a company is and the better its ability to cover its outstanding debt.
The term liquidity refers to the ability of an asset to be quickly and easily converted into cash without incurring large costs. The liquidity ratio is most effective when used in the form of a comparison, both internally and externally.
Internal analysis is carried out by comparing the liquidity ratio of several accounting periods using the same recording method. Comparison between the previous period and the current period helps analysts see developments or changes in the company's performance.
External analysis is carried out by comparing a company's liquidity ratio with other companies or with the industry average. This information is useful for assessing the strategic position of the company compared to competitors and setting more appropriate performance targets.
Type of Liquidity RatioAs mentioned above, the liquidity ratio is divided into three, namely the current ratio, quick ratio, and cash ratio. The following is an explanation of the three types of liquidity ratios:
Current RatioThe current ratio is used to measure a company's ability to meet its current liabilities (due within one year) using its current assets, such as cash, trade receivables, and inventory.
The higher the current ratio value, the better the company's liquidity condition. The current ratio can be calculated with the following formula:
Current Ratio= Current Assets/Current Liabilities
Quick RatioQuick ratio is a type of liquidity ratio that assesses a company's ability to pay short-term liabilities using the most liquid assets. Therefore, inventory is not included in the calculation. This ratio is also known as the acid-test ratio.
The following formula can be used to calculate the quick ratio:
Quick Ratio = (Cash + Accounts Receivable + Securities) / Current Liabilities
Cash RatioMeanwhile, the cash ratio is used to compare cash flow with bills that currently have to be paid. Cash flow refers to the cash a company has or the cash equivalent, such as securities, treasury bills, and so on.
To calculate the cash ratio, you can use the following formula:
Cash ratio = (Cash + Securities) / Current Liabilities
Example of Calculating Company LiquidityPT XXX has current assets of Rp. 800 million, cash of Rp. 200 million and securities of Rp. 400 million. In addition, the company also has current liabilities of Rp. 200 million and inventory worth Rp. 800 million. Calculate the current ratio, cash ratio, and cash ratio of the XXX company.
Answer:
Current Ratio CalculationCurrent Ratio= Current Assets/Current Liabilities
Current Ratio = Rp800 million / Rp100 million
Current Ratio: 4
The results of the calculation of PT XXX's current ratio, which is worth 2, which means that the company has good liquidity.
Quick Ratio CalculationQuick Ratio = (Cash + Accounts Receivable + Securities) / Current Liabilities
Quick Ratio = (Rp200 million + Rp200 million + Rp400 million) / Rp200 million
Quick Ratio = 4
The results of the quick ratio calculation of PT XXX are also worth 4 which means that the company has very good financial ability.
Cash RatioCash ratio = (Cash + Securities) / Current Liabilities
Cash Ratio = (Rp200 million + Rp400 million) / Rp200 million:
Cash Ratio= 3
The result of the cash ratio calculation is 3, indicating that the company's cash is very good.
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