Liquidity ratios and solvency ratios

Liquidity ratios (37)

  • Ability to satisfy short-term obligations as they come due
  • Should use the following ratios collectively
    • Current ratio (CA/CL) (38)
      • How a company can maximize current assets on its balance to satisfy its current debt and payables 
    • Quick ratio (39)
      • Excluding inventory from current asset
      • Indicate the company’s ability to instantly use its near-cash assets
    • Cash ratio (40)
      • Excluding inventory and receivables
      • ability to repay its short-term debt with cash or near-cash resources, such as easily marketable securities.

Solvency ratios (37)

  • Ability to satisfy long-term obligation
  • Should use the following ratios collectively
  • Long-term debt-to-equity (38)
    • High → risk as company must meet principal and interest on its obligations.
  • Total debt-to-equity (D/E) (39)
    • Used to evaluate a company’s financial leverage
    • Reflects the ability of shareholder equity to cover all outstanding debts in the event of a business downturn.
  • Debt ratio (40)
    • Company may be putting itself at a risk of default on its loans if interest rates were to rise suddenly.
  • Financial leverage (41)
    • the use of debt to acquire additional assets.


  • Limitation by difference in accounting standards
  • Different industries 
  • Significant judgement
  • Balance sheet data is measured at a single point in time


  • Receivable
    • are debts owed to a company by its customers for goods or services that have been delivered or used but not yet paid for.