Absolute liquid ratio
In addition to computing current and quick ratio, some analysts also compute absolute liquid ratio to test the liquidity of the business. Absolute liquid ratio is computed by dividing the absolute liquid assets by current liabilities.
Formula:
The formula to compute this ratio is given below:
Absolute liquid assets are equal to liquid assets minus accounts receivable and bills receivable. These assets usually include cash, cash equivalents, bank balances and marketable securities etc.
Example
Following are the current assets and current liabilities of a trading company:
Current assets:
- Cash and Bank: $5,000
- Marketable securities: $18,000
- Accounts receivables, net: $8,000
- Inventories: $10,000
- Prepaid expenses: $500
Current liabilities:
- Accounts payable: $15,000
- Accrued payable: $5,000
- Notes payable: $8,000
Required: Compute current ratio, quick ratio and absolute liquid ratio from the above data.
Solution
(1). Current ratio:
Current assets/Current liabilities
= $41,500 / $28,000
= 1.48
or
1.48 : 1
(2). Liquid ratio:
Liquid assets/Current liabilities
= $31,000* / $28,000
= 1.1
or
=1.1 : 1
(3). Absolute liquid ratio:
Absolute liquid assets/Current liabilities
= $23,000** / $28,000
= 0.82
or
0.82 : 1
*Liquid assets: $5,000 + $18,000 + $8,000 = $31,000
**Absolute liquid assets: $5,000 + $18,000 = $23,000
The reason of computing absolute liquid ratio is to eliminate accounts receivables from the list of liquid assets because there may be some doubt about their quick collection. This ratio is useful only when used in conjunction with current ratio and quick ratio. An absolute liquid ratio of 0.5:1 is considered ideal for most of the companies.
12 Comments on Absolute liquid ratio
Very good explanation its is very useful for me great job……
Thanks Murtaza.
its most be needed for mgmt student
verx good explanation,very helpful
thank you AM..
its very helpful for the preparation of my assignment and viva..
The above discussion about ratio analysis is very effective for practical job sector.
My hat is off to your astute command over this to-vapbrcio!
yes all ratios are very important for analysis .we can easily make dissension for lending .
Very good explanation….
very good explanation. Thank you so much.
wtf is cash ration then?
df is cash ratio?