4.13 Liquidity Ratios
The
origin of financial statement analysis was tied to assessing a
firm’s ability to repay its debts.
As such liquidity ratios were among the first ratios to
emerge in 19th century financial statement analysis.
The most common liquidity ratios are:
Current Ratio = Total Current Assets/Total Current
Liabilities
Quick (or Acid) Ratio = Total Quick Assets/Total Current
Liabilities
A “Quick”
asset is an asset that is easily converted to cash.
The most common examples being cash, cash equivalents,
marketable securities and accounts receivable.
Both inventories and prepayments are excluded.
From the above it is clear that Wal-Mart has a very
aggressive Quick Ratio!
Clearly, Wal-Mart Management is less conservative
with respect to their Quick Ratio than is Target Management
but recall Wal-Mart has a stronger cash conversion cycle
than Target.