What Do Liquidity Ratios Try to Measure?
It suggests whether the said company has adequate cash flow to meet its short-term expenses and liabilities. NWC is worked out by dividing non-fixed assets by liabilities.
The capital required to run a business actually varies between industries. Many factors affect the working capital requirements of the company, including its past dues from debtors written off, asset purchases, and differences in payment policies.
WC reflects various business activities, like debt management, receivables collection, inventory management, and payments to suppliers. These are reflected in its working capital because it includes cash, accounts payable, receivables, stock, and portions of short-term debt.
For an organization, the liquidity ratio basically measures its ability to settle its liabilities when due, or how effectively or easily it can access the funds it requires to cover its financial obligations. Working capital (WC) reflects the assets which a company uses to pay off such debt, which is due in one year.
There are many different liquidity ratios out there. Liquidity ratios are a class of metrics used to find out a debtor’s capability to repay current obligations without having to raise external capital.