Liquidity Vs Profitability
What is liquidity? Liquidity refers to the ability of the business to pay off its SHORT TERM DEBT. What is Profitability ? Profitability refers to the ability to generate profit after taking into account the sales revenue , other income and expenses of the business. Liquidity -- to check on the ability to pay, so we look at the statement of financial position. Profitability- to check on how well the business perform, we look at the statement of financial performance. There are a few formula that we need to look at for liquidity Working capital ratio = Current Assets - Current Liabilities Current ratio = Current assets/ Current liabilities Quick ratio/Acid test ratio =( Current Assets- prepayment-inventory)/Current liabilities If working capital ratio is positive, means that the business has more Current assets to pay off its current liabilities. If current ratio is 2 or above, means that the business has the ability to pay off its current/ short term debts. If current ratio go below 2,