LIQUIDITY RATIOS
Liquidity ratios assess the company’s ability to pay its short-term debts obligations. Generally, th ehigher the value of the ratio, the larger the margin of safety that the company possesses to cover temporary debts.
Common liquidity ratio include the current ratio and the acid-test ratio (quick ratio).
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Current Ratio
The current ratio is an indication of a firm’s market liquidity and ability to meet creditors’ demands. Accettable current ratios vary from industry to industry and from market to market but they are usually between 1.5 and 2.
If a company’s current ratio is in this range, as Tantum’s, then it genrally indicates good short-term financial strenght. If the value obtained is below 1 the company may have problems meeting its short-term obligations. However, if the ratio is too high the company may not be efficiently using its current assets.
For every $1 of short-term debt Tantum has $1.41 of current assets to pay for them. It's not a completely safe position but it's still acceptable.
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Acid test Ratio (quick ratio)
The quick ratio, as the current ratio, is an indicator of a company’s short-term liquidity. It measures a company’s ability to meet its short-term obligations with its most liquid assets. For this reason the ratio excludes inventories from current assets.
So the quick ratio measures the dollar amount of liquid assets available for each dollar of current liabilities.
Thus Tantum’s quick ratio of 1.27 means that the company has $1.27 of liquid assets to cover each $1 of current liabilities. The higher the quick ratio, the bette the company’s liquidity posistion.
Current ratio =
Current assets
Current liabilities
Tantum's current ratio =
$ 447,800
$ 105,000
= 1.41
Acid test ratio =
Liquid assets
Current liabilities
Tantum's acid test ratio =
$ 134,000
$ 105,000
= 1.27