3.7.3—Liquidity position
- Syllabus
- First assessment 2024
- Objective
- 3.7.3
- Level
- HL
Liquidity is the ability to meet short-term commitments
Liquidity is the ability to pay short-term obligations from available current assets. The current ratio = current assets ÷ current liabilities; the acid-test ratio = (current assets − inventory) ÷ current liabilities.
The acid test removes stock because stock may take time to sell or may realise less than its recorded value. A current ratio of 3.07:1 and acid test of 1.44:1 tell different stories about a stock-heavy firm’s immediate capacity.
Compare ratios with cash-flow forecasts, credit terms and industry practice. A firm with fast customer payments can operate safely with less liquidity than one whose inventory and receivables turn slowly.
Liquidity is not profit and a ratio threshold is not a universal safety line. Check the quality and timing of current assets, upcoming bills and access to finance.