Current ratio: This ratio measures a company’s ability to cover its short-term liabilities with its short-term assets. A higher current ratio indicates a stronger liquidity position, suggesting that the company can easily pay off its debts as they come due. It is calculated by dividing current assets by current liabilities, so a current ratio of two means a company has twice as many assets as liabilities.
Quick ratio: Also known as the acid-test ratio, the quick ratio evaluates a company’s capacity to meet its short-term obligations without relying on inventory sales. It is a more stringent measure than the current ratio, as it excludes inventory from current assets. A quick ratio greater than one is generally considered favorable, indicating that the company can cover its liabilities with its most liquid assets.
Cash ratio: This ratio focuses solely on a company’s cash and cash equivalents. It provides the most conservative view of liquidity, as it only considers the most liquid assets. A cash ratio of one or higher suggests that the company has enough cash on hand to pay off its short-term debts immediately.
Operating cash flow ratio: This ratio assesses how well a company can pay off its current liabilities with the cash generated from its operations. It is calculated by dividing operating cash flow by current liabilities. A higher ratio indicates that the company is generating sufficient cash flow to maintain its liquidity without relying on external financing.