Business – 10.2 Analysis of published accounts – Liquidity ratios | e-Consult
10.2 Analysis of published accounts – Liquidity ratios (1 questions)
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An acid‑test ratio below 1 means that the firm’s quick assets (cash, marketable securities, and receivables) are insufficient to cover its current liabilities. A ratio of 0.78 indicates that for every £1 of current liabilities the firm can meet only £0.78 with its most liquid assets.
- Liquidity risk: The firm may struggle to settle immediate obligations without resorting to inventory sales or external financing.
- Creditor perception: Creditors might view the firm as a higher credit risk, potentially demanding stricter credit terms or higher interest rates.
- Operational implications: Management may need to improve cash collection, reduce short‑term borrowing, or increase liquid asset holdings to strengthen the ratio.