How to Determine a Company's Liquidity
The liquidity of a company is the amount of liquid assets the business has to pay current bills. Liquidity is important to business managers, as well as to investors and lenders. Because liquidity involves the ability to pay current bills, the liquidity calculation is performed using the current asset values and current liability totals of the business. Current asset and liability totals are found on the company's balance sheet and represent assets that may be converted to cash within a year, and bills that are due within a year. There are two liquidity ratio calculations that may be performed: a current ratio and a quick ratio.
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Instructions
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Current Ratio
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1
Look at the balance sheet and determine the company's total current assets.
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2
Determine the company's total current liabilities.
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3
Divide the current asset total by the current liability total. The result is the company's liquidity.
Quick Ratio
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4
Calculate the company's total current assets.
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5
Subtract any inventory values from the current asset calculation. The result is the asset value to use in the quick ratio calculation.
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6
Calculate the company's total current liabilities.
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7
Divide the current assets (minus inventory) by the current liability total. The result is the company's liquidity when inventory liquidations are not considered.
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