Liquidity Ratios

The liquidity of a business firm is measured by its ability to satisfy its short-term obligations as they come due. Firms generally meet these obligations by using their current assets, i.e., those assets which can quickly and easily be converted into cash. The three basic measures of liquidity are: net working capital, the current ratio, and the quick (acid-test) ratio.

Net Working Capital

Working capital, sometimes called gross working capital, simply means current assets. The company's net working capital is calculated by subtracting total current liabilities from total current assets. The net working capital for Jimco in 1993 was as follows:

Net Working Capital = Current Assets - Current Liabilities
NWC $24,000,000 - $10,100,000 = $14,000,000

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Finance For Strategic Management
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