The following formulas (aside from working capital, which isn’t a ratio) are called liquidity ratios. They measure a company’s capability to meet its short-term obligations and to convert receivables and inventory into cash. The liquidity ratios we cover are current ratio, quick ratio, A/R turnover, collection period, inventory turnover, and days’ sales on hand. But first, let’s examine working capital.
measures a company’s capability to pay its current obligations. The formula for working capital is:
Working capital = Current assets – Current liabilities
Current assets and current liabilities are listed on the balance sheet.
Working capital measures a company’s capability to ...