Understanding Liquidity Ratios in Financial Analysis

The video tutorial explains liquidity in business, focusing on how quickly assets can be converted into cash to meet liabilities. It introduces liquidity ratios, particularly the current ratio, which compares current assets to current liabilities. An example calculation is provided, showing a healthy 8:1 ratio. The tutorial discusses the importance of balancing liquidity, aiming for a current ratio between 1 and 1.5. It also covers strategies for managing liquidity by adjusting assets and liabilities.

What is the primary purpose of liquidity ratios in a business context?

• To measure long-term profitability

• To assess the ability to meet short-term liabilities

• To evaluate employee performance

• To determine market share

How is the current ratio calculated?

• By dividing total liabilities by total assets

• By dividing current assets by current liabilities

• By subtracting liabilities from assets

• By adding current assets and liabilities

In the example provided, what does a current ratio of 8 to 1 indicate?

• The business is likely to face bankruptcy

• The business has excess liquidity

• The business is in a risky financial position

• The business has insufficient liquidity

What is considered an ideal range for the current ratio?

• Between 3 and 4

• Between 2 and 3

• Between 1 and 1.5

• Between 0.5 and 1

What might be a consequence of having too much liquidity?

• Increased risk of bankruptcy

• Higher returns on investments

• Excessive cash reserves with low returns

• Inability to pay short-term debts

Which strategy can help a business increase its liquidity?

• Increasing long-term liabilities

• Reducing current liabilities

• Increasing fixed assets

• Decreasing current assets

Why is it important for a business to balance liquidity and profitability?

• To ensure high employee satisfaction

• To maximize shareholder returns while maintaining solvency

• To increase market share

• To reduce operational costs