###### Asked in Investing and Financial Markets

Investing and Financial Markets

# Are Liquidity Ratios the higher the better?

## Answer

###### Wiki User

###### June 02, 2009 8:51AM

No. High liquidity ratios may affect the amount of capital that can be invested/used to earn. Let us say in banks, if we increase the liquidity ratio by 10% the bank would have to reduce lending by that 10% to bridge the gap. which in turn would severely affect the banks earnings.

## Related Questions

###### Asked in Investing and Financial Markets

### What is the financial ratio used to assess a company's liquidity?

The quick ratio which equals total assets/total liabilities
Answer:
Liquidity Ratios are the ratios that can be used to measure the
liquidity of a company. As a rule of the thumb, all companies must
have good liquidity ratios.
The four main ratios that fall under this category are:
1. Current Ratio or Working Capital Ratio
2. Acid-test Ratio or Quick Ratio
3. Cash Ratio
4. Operation Cash-flow ratio

###### Asked in Business Accounting and Bookkeeping

### What are liquidity ratios?

Liquidity refers to the ability of a borrower to pay his debts
as and when they fall due. Good liquidity is a requirement of all
companies especially banks and other financial institutions.
Imagine going to your bank to withdraw cash and the cashier at the
counter says, I don't have enough money in the branch come back
later. It would be frustrating wouldn't it be? This would not
happen if the bank had enough liquidity to meet its daily customer
withdrawal needs.
Ok, now coming back to the topic, Liquidity Ratios are the
ratios that can be used to measure the liquidity of a company. As a
rule of the thumb, all companies must have good liquidity
ratios.
The four main ratios that fall under this category are:
1. Current Ratio or Working Capital Ratio
2. Acid-test Ratio or Quick Ratio
3. Cash Ratio
4. Operation Cash-flow ratio

###### Asked in Accounts Payable, Accounts Receivable, Financial Statements

### What is Liquidity ratio analysis?

RATIO ANALYSIS Meaning and definition of ratio analysis: Ratio
analysis is a widely used tool of financial analysis. It is defined
as the systematic use of ratio to interpret the financial
statements...
measure of a firms ability to meet short term cash payments.
bassically liquidity ratios show how good a business is at paying
off its debts. hope this helps :)
liquidity ratios include current ratio (which is current
assets/current liabilities) and acid test (which is current assets-
stock/current liabilities.) liquidity ratio's shows how good a
business is...

###### Asked in Business Accounting and Bookkeeping

### Dividing users of ratios into short term lenders long term lenders and stockholders which ratios would each group be most interest in and for what reasons?

1 because short-term
lenders liquidity
concern is with the firm's
ability to pay short-term
obligations as they come due.
2 because
Long-term
lenders--leverage
ratios
are concerned with the relationship of debt to total
assets.Long-term
lenders--leverage
ratios will examine profitability to insure that
interest payments can be made.
3.
because
Stockholders--profitability
ratios, with secondary consideration given to debt
utilization, liquidity, and other ratios. Since stockholders are
the ultimate owners of the firm, they are primarily concerned with
profits or the return on their investment.

###### Asked in Business Accounting and Bookkeeping, Management and Supervision, Financial Statements

### What is the purpose of financial ratios?

Financial ratios have two primary users, investors and
management. Management uses financial ratios to determine how well
their firm is performing in order to evaluate where the firm can
improve. For example, if a firm has a low gross margin, a manager
can evaluate how to increase their gross margin. Investors use
financial ratios to see if the firm is a good investment. By
comparing financial ratios between companies and between
industries, investors can better determine the best investment.
Liquidity Ratios
Leverage Ratios
Liquidity ratios deal with a firm's short-term financing and
debt. By being liquid, a firm is quickly able to convert assets to
cash, and pay off interest. The main liquidity ratios are the
current ratio and quick ratio.
Operational Ratios
Leverage ratios involve the amount of debt used to finance a
firm's assets. A firm can finance through debt or equity. The firm
must eventually pay back debt, while equity is an investment in the
company. The main leverage ratios are debt to equity ratio and
long-term debt to capitalization ratio.
Profitability Ratios
Operational ratios show a firm's performance. For example,
accounts receivable turnover ratio shows the firm's performance in
collecting accounts receivable. Inventory turnover ratio shows a
firm's performance in converting inventory into cost of goods sold.
Solvency Ratios
Profitability ratios show the return on sales and the
profitability of the firm. The main profitability ratios are return
on assets, return on equity and return on capital employed.
Solvency ratios show the firm's ability to pay off debt through
cash flows. The main solvency ratio is the solvency ratio. The
solvency ratio divides net tax profit plus depreciation by
short-term liabilities plus long-term liabilities. A general rule
of thumb is that a solvency ratio of about 20 percent is
healthy.

###### Asked in Banking

### Which financial ratios are used by banks?

1. Liquidity Ratios - Ability of the company to pay off debt
2. Activity Ratios - How quickly a firm can convert its non-cash
assets to cash assets
3. Debt Ratios - Ability of the firm to repay long-term debt
4. Profitability Ratios - To Measure the firms use of its assets
and control of its expenses to generate an acceptable rate of
return
5. Market Ratios - To Measure the investor response to owning a
company's stock and also the cost of issuing stock

###### Asked in Business Plans, Business Accounting and Bookkeeping, Business Finance

### What ratios are short-term lenders interested in?

I would think liquidity ratios, cash flow, days in receivables,
and inventory turns might be a part of their interests. Lender will
check following - 1. Leverage (TOL/TNW & TD/TNW) - irrespective
of the tenor/type of loan 2. Liquidity Ratio 3. Liquidity Ratios (
current Ratio, inventory turnover ratio, debtors & creditors
turnover ratio) 4. Net Working capital - to assess working capital
requirement 5. ISCR- Interest service coverage ratio to check
capacity to repay interest (in case of CCor OD) 5 DSCR - Debt
Service coverage ratio to check capacity to repay interest+ capital
(in case of term loan)