Ratio, Liquidity

The liquidity ratio is a financial ratio that measures if a firm has enough liquid resources – such as cash and accounts receivable – to pay its debts over the next 12 months. It is derived by calculating the ratio of current assets less inventory to current liabilities. A value of less than 1.0 is usually considered a source of some concern, though the ratio will vary from industry to industry. The liquidity ratio is also called the ‘acid test’ or ‘quick ratio’ because by excluding inventory it provides a realistic guide to a firm’s solvency. As with all ratios, the trend is more important than any one value. See also Ratio Analysis and Ratio, Current.

« Back to Glossary Index

Discover the world’s largest Glossary of Procurement terms

With over 800 Procurement specific terms (and growing) you will find everything you need to know or thought you knew about the Procurement function. Our aim is to provide you with a comprehensive list collated from the Comprara Groups hub of training and consulting source materials.The Procurement Glossary has been compiled by industry expert Paul Rogers.