- CFA Exams
- 2024 Level I
- Topic 5. Financial Statement Analysis
- Learning Module 11. Financial Analysis Techniques
- Subject 3. Liquidity Ratios
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Subject 3. Liquidity Ratios PDF Download
Liquidity ratios measure the ability of a company to meet short-term obligations. Major liquidity ratios such as current ratio, quick ratio, and cash ratio are discussed in Topic [Analyzing Balance Sheets].
Cash Conversion Cycle = DOH + DSO - Number of Days of Payables
Note: Analysts should be aware of the impact of accounting choices and accounting transactions on liquidity ratios. For example, payment of an accounts receivable has no effect since one current asset is increasing and another is decreasing. Capitalizing a lease decreases the current ratio, since capitalizing a lease puts a liability on the balance sheet and the portion due in the next year is classified as a current liability. An increase in the turnover ratio decreases the number of days for collection of a receivable or sale of inventory and hence shortens the cash conversion cycle. Use of LIFO versus FIFO in periods of rising prices results in a lower inventory balance and hence a lower current ratio.
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