What are the liquidity, current and efficiency ratios?
- Liquidity Ratio is to check if the organisation has enough money to pay the bills. In Liquidity ratios, we recognise the current ratio and acid test ratio (quick ratio).
- Current ratio. Purpose of it is to measure whether the business has sufficient current assets to cover payment of current liabilities. The ratio compares assets that will become liquid in less than 12 months with liabilities that are due in the same period.
The current ratio is used by Managers, directors or bank to make comparisons year on year and between companies. Those all people want to know that the business is liquid and can meet all short-term debts.
The most commonly accepted ratio should be 2:1 It means the organisation has £2 assets to every £1 liabilities. If the current ratio is too high, it could mean that funds are better employed in the business to generate more income rather than sitting in cash or in the bank or tied up in inventory.
- Efficiency Ratio is about is the organisation making the best use of its resources.
The rate of stock turnover – this ratio shows how long the business is holding on to stock. Ideally, firms do not want the stock to stay in business too long. Stock turnover is the average time an item of stock is kept in the business before selling it.