What are two measures of liquidity? (2024)

FAQs

What are two measures of liquidity? ›

Market liquidity and accounting liquidity are two main classifications of liquidity, and financial analysts use various ratios, such as the current ratio, quick ratio, acid-test ratio, and cash ratio, to measure it.

Market liquidity and accounting liquidity are two main classifications of liquidity, and financial analysts use various ratios, such as the current ratio, quick ratio, acid-test ratio, and cash ratio, to measure it.

Liquidity ratios measure a company's ability to pay debt obligations and its margin of safety through the calculation of metrics including the current ratio, quick ratio, and operating cash flow ratio.

There are following types of liquidity ratios: Current Ratio or Working Capital Ratio. Quick Ratio also known as Acid Test Ratio. Cash Ratio also known Cash Asset Ratio or Absolute Liquidity Ratio.

Liquid markets tend to exhibit five characteristics: (i) tightness; (ii) immediacy; (iii) depth; (iv) breadth; and (v) resiliency. Tightness refers to low transaction costs, such as the difference between buy and sell prices, like the bid-ask spreads in quote-driven markets, as well as implicit costs.

There are two different types of liquidity risk. The first is funding liquidity or cash flow risk, while the second is market liquidity risk, also referred to as asset/product risk.

The correct answer is option D) current ratio and quick ratio. The current ratio is computed by dividing the current assets by the current liabilities. On the other hand, the quick ratio is ascertained by dividing the sum of cash and accounts receivable by the current liabilities.

Answer and Explanation: Assets and liabilities are the two important factors considered while managing liquidity. For banks, it has been observed that asset-based liquidity is more significant than liability-based liquidity.

The cash ratio is the most conservative measure of liquidity, calculated by dividing cash and cash equivalents by current liabilities. It shows your ability to pay off short-term debts with cash on hand, ignoring receivables and inventory, which may take time to convert into cash.

A liquidity ratio is used to determine a company's ability to pay its short-term debt obligations. The three main liquidity ratios are the current ratio, quick ratio, and cash ratio. When analyzing a company, investors and creditors want to see a company with liquidity ratios above 1.0.

What are the two dimensions of liquidity? ›

An asset's liquidity has two dimensions: (1) the speed and ease with which the asset can be sold and (2) whether the asset can be sold without loss of value.

It is calculated by dividing current assets less inventory by current liabilities. The optimum ratio is 1, above this figure there is good capacity to meet payments, below 1 there are weaknesses.

Definition: Liquidity means how quickly you can get your hands on your cash. In simpler terms, liquidity is to get your money whenever you need it. Description: Liquidity might be your emergency savings account or the cash lying with you that you can access in case of any unforeseen happening or any financial setback.