Also called working capital ratios. They indicate ability of the firm to meet its short term maturing financial obligation/current liabilities as and when they fall due.
The ratios are concerned with current assets and current liabilities. They include:
a) Current ratio = Current Assets
This ratio indicates the No. of times the current liabilities can be paid from current assets before this assets are exhausted.
The most recommended ratio is 2.0 i.e. the current asset must at least be twice as high as current liabilities
b) Quick/acid test ratios = Current Asset - Stock
Is a more refined current ratio which exclude amount of stock of the firm. Stocks are excluded for two basic reasons.
i) They are valued on historical cost basis
ii) They may not be converted into cash very quickly
The ratio therefore indicates the ability of the firm to pay its current liabilities from the more liquid assets of the firm.
c) Cash ratio = Cash in hand/bank + short term marketable securities
This is a refinement of the acid test ratio indicating the ability of the firm to meet its current liabilities from its most liquid resources.
Short term marketable securities refers to short term investment of the firm which can be converted into cash within a very short period e.g commercial paper and treasury bills.
d) Net working capital Ratio = Networking Capital x 100
Where Net Assets or Capital employed = Total Assets – Current liability
This ratio indicates the proportions of total net assets which is liquid enough to meet the current liabilities of the firm.
It is expressed in % term.