‘Cash ratio’ is used to measure company’s liquidity. To start from terminology, liquidity means the ability to pay up debt and obligations taken. The higher the liquidity, the more resources a company has to satisfy its creditors. Liquidity is achieved by having cash and cash equivalents, accounts receivable and inventory at least at stabile levels. The higher those levels, the more liquid a company may be deemed.

Company’s liquidity using the cash ratio is therefore measured using the following formula – cash and cash equivalents are divided by current liabilities. Essentially, since cash is the main resource all debt is paid up with, it reflects just how quickly a company can satisfy all its creditors. However, the problem with this ratio is the sheer fact that it only includes cash and no other current yet very liquid asset. As accounts receivable and inventory are usually highly collectable and tradable, the cash ratio shows the very conservative point of liquidity – pure cash resources against liabilities.
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One way to measure a company’s efficiency is to calculate its Return on Equity or ROE. As you know, equity is something the owners have invested into the company on one hand in the form of share capital and on the other hand as retained earnings meaning the profit that has not been distributed, but instead has been invested into machinery, equipment and so on.

ROE is an indicator of how profitable the company is in relation to total capital invested by its shareholders. Consequently, ROE is calculated as follows: annual earnings (net profit before dividends paid out) are divided by shareholders equity (excluding preference shares). The end result is displayed in percentage thus showing how profitable the equity of a company is.
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One way to measure a company’s efficiency is to calculate its Return on Assets or ROA. As you know, assets on the balance sheet are essentially proceeds of or means to make business. They are the resources a company has in its possession to use according to its management best judgment.

ROA is an indicator of how profitable the company is in relation to its total assets (including both current and non-current assets as of the balance sheet date). Essentially ROA shows how efficiently the management uses the resources available for them to generate profit. Consequently, ROA is calculated as follows: annual earnings (net profit) are divided by total assets. The end result is displayed in percentage thus showing how profitable the assets of the company are.
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‘Quick ratio’ is used to measure company’s liquidity. To start from terminology, liquidity means the ability to pay up debt and obligations taken. The higher the liquidity, the more resources a company has to satisfy its creditors. Liquidity is achieved by having cash and cash equivalents, accounts receivable and inventory at least at stabile levels. The higher those levels, the more liquid a company may be deemed.

Company’s liquidity using the quick ratio is therefore measured using the following formula – current assets minus inventory is divided by current liabilities. Current assets are the resources, which are used to satisfy all current liabilities due in less than 12 months. As current assets are also meant to be collected and turned into tradable resources (i.e. cash) in less than 12 months, those two enable us to evaluate the company’s ability to continue as a going concern using its current business course and finances.
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‘Current ratio’ is used to measure company’s liquidity. As you know, liquidity means the ability to pay up debt and obligations taken. The higher the liquidity, the more resources a company has to satisfy its creditors. Liquidity is achieved by having cash and cash equivalents, accounts receivable and inventory at least at stabile levels. The higher those levels, the more liquid a company may be deemed.

Company’s liquidity is therefore measured using a simple formula – current assets are divided by current liabilities. Current assets are the resources, which are used to satisfy all current liabilities due in less than 12 months. As current assets are also meant to be collected and turned into tradable resources (i.e. cash) in less than 12 months, those two enable us to evaluate the company’s ability to continue as a going concern using its current business course and finances.
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