Which Liquidity Ratio Is Most Important?

What are the most important liquidity ratios and why?

4 Common Liquidity Ratios in AccountingCurrent Ratio.

One of the few liquidity ratios is what’s known as the current ratio.

Acid-Test Ratio.

The Acid-Test Ratio determines how capable a company is of paying off its short-term liabilities with assets easily convertible to cash.

Cash Ratio.

Operating Cash Flow Ratio..

What is a good liquidity ratio?

A good liquidity ratio is anything greater than 1. It indicates that the company is in good financial health and is less likely to face financial hardships. The higher ratio, the higher is the safety margin that the business possesses to meet its current liabilities.

Why are liquidity ratios important?

Liquidity ratios are an important class of financial metrics used to determine a debtor’s ability to pay off current debt obligations without raising external capital. … Current liabilities are analyzed in relation to liquid assets to evaluate the coverage of short-term debts in an emergency.

What is the most important ratio for investors?

5 Financial Ratios Every Investor Needs to UnderstandEarnings per share. One of the most important factors used in determining a company’s stock price, the earnings-per-share (EPS) ratio, will tell you how much of a company’s earnings, or net income, can be allocated to each outstanding common share. … P/E ratio. … Dividend yield. … Price-to-sales ratio. … Debt ratio. … The big picture.

What are the 5 types of ratios?

Classification. Ratio analysis consists of calculating financial performance using five basic types of ratios: profitability, liquidity, activity, debt, and market.

What is a good cash ratio?

The cash ratio is a liquidity ratio that measures a company’s ability to pay off short-term liabilities with highly liquid assets. … There is no ideal figure, but a ratio of at least 0.5 to 1 is usually preferred.