(a) Current Ratio: It is calculated as follows :
Current assets loans and advances/ Current liabilitie s and provisions
This ratio measures the solvency of the company in the short run (1 year). Current assets are those assets which can be converted into cash within one accounting period (usually 1 year) and current liabilities are those liabilities which are payable within a year. A current ratio of 1:33:1 is the minimum ratio required by banks to finance working capital needs. A very high current ratio implies that the firm has blocked the funds in inventories, debtors or idle cash.
(b) Quick Ratio or Liquid Ratio: It is calculated as follows :
Current assets, loans and advances − Inventorie s/Current liabilitie s and provisions − Bank Overdraft
This ratio is a modification of the current ratio. In this ratio, inventories are subtracted from current assets and the bank overdraft is subtracted from current liabilities. The reason for doing so is that the bank overdraft is secured by inventories. This ratio depicts the ability of the firm to service current liabilities other than the bank overdraft.
(c) Absolute Liquid Ratio (Super Quick Ratio): It is calculated as follows:
Absolute liquid assets/Current liabilities
Current assets loans and advances/ Current liabilitie s and provisions
This ratio measures the solvency of the company in the short run (1 year). Current assets are those assets which can be converted into cash within one accounting period (usually 1 year) and current liabilities are those liabilities which are payable within a year. A current ratio of 1:33:1 is the minimum ratio required by banks to finance working capital needs. A very high current ratio implies that the firm has blocked the funds in inventories, debtors or idle cash.
(b) Quick Ratio or Liquid Ratio: It is calculated as follows :
Current assets, loans and advances − Inventorie s/Current liabilitie s and provisions − Bank Overdraft
This ratio is a modification of the current ratio. In this ratio, inventories are subtracted from current assets and the bank overdraft is subtracted from current liabilities. The reason for doing so is that the bank overdraft is secured by inventories. This ratio depicts the ability of the firm to service current liabilities other than the bank overdraft.
(c) Absolute Liquid Ratio (Super Quick Ratio): It is calculated as follows:
Absolute liquid assets/Current liabilities
It is a ratio of absolute liquid assets to quick liabilities. However, for calculation purpose current liabilities are taken into consideration. Absolute liquid assets are cash, bank balances and marketable securities. An ideal absolute liquid ratio is taken as 1:2 or .5.
(d) Bank Finance to Working Capital Gap Ratio: It is calculated as follows:
Short term bank borrowings/Working capital gap
This ratio shows the dependence on bank finance for working capital.Working capital gap is equal to current assets minus current liabilities other than bank borrowings.
(e) Interval Measures: A dynamic measure of liquidity, the interval measure is defined as:
Quick assets/Average daily expenses on operations
Interval measure shows the time interval for which the liquid assets of the firm will suffice to meet its operating expenditure.
(d) Bank Finance to Working Capital Gap Ratio: It is calculated as follows:
Short term bank borrowings/Working capital gap
This ratio shows the dependence on bank finance for working capital.Working capital gap is equal to current assets minus current liabilities other than bank borrowings.
(e) Interval Measures: A dynamic measure of liquidity, the interval measure is defined as:
Quick assets/Average daily expenses on operations
Interval measure shows the time interval for which the liquid assets of the firm will suffice to meet its operating expenditure.
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