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How do you calculate liquidity?

To determine liquidity, accountants usually use one of two ratio measurements. The current ratio is calculated by dividing total current assets by total current liabilities. This provides insight as to the relative amount of working capital available. A more stringent measure of liquidity is the quick ratio,...

Is current ratio good or bad?

Generally a business with a current ratio under 1 is considered bad. A current ratio under 1 implies that for every dollar of current debt the business does not have a dollar in current assets to meet the obligation. But Current Ratio has bit of a problem. It incorporates inventory as a part of Current Assets.

What does a good current ratio mean?

The best current ratio is between 1.2 to 2. A current ratio below 1 means that the company doesn’t have enough liquid assets to cover its short-term liabilities. A ratio equal to 1 indicates that current assets are equal to current liabilities and that a company is just able to cover all of its short-term obligations.

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