Liquidity
Business: BTEC Level 3 National Extended Diploma, topic 3.3.3
Financial Ratios
The financial performance of a business can be assessed using financial ratios.
Current ratio
- The current ratio calculation allows a business to explore its liquidity by comparing current assets with current liabilities.
- Current ratio can be calculated using:
- Current assets ÷ current liabilities
Acid Test ratio
- The acid test ratio measures liquidity but discounts stock (inventories) which cannot quickly be turned into cash.
- The acid test ratio can be calculated using:
- (Current assets − stocks) ÷ current liabilities
Test yourself on Liquidity
What allows a business to explore its liquidity by comparing current assets with current liabilities?