What will you use to gauge the company’s liquidity – cash flow or income?

4 years ago
Financial Management

Measuring the firm’s liquidity means finding the company’s ability to pay its current debt with its current assets. Here is a basic process to measure the company’s liquidity:

  • Calculate the current ratio of the company (Current Assets/Current Liabilities)
  • Calculate the quick ratio (Current Assets-Inventory/Current Liabilities)
  • Find the Net Working Capital of the company (Current Assets – Current Liabilities)

However, if you choose between cash flow or income, the better idea is to gauge the company’s liquidity based on cash flow, since using earnings is a more reliable approach. 

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Sanisha Maharjan
Sanisha Maharjan
Jan 18, 2022
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