Rise in
Liquidity and Signs of
Liquidity ratios play a very important role in assessing a firm’s ability to pay long-term and short-term creditors. Liquidity ratios can be used to compare a firm’s assets against its short term liabilities. This way, they will know if the firm is capable of paying all its debts, without running out of funds. Firms with very low liquidity ratios will find it difficult to meet their financial obligations. However, an increase in liquidity ratio doesn’t prove the company’s prudent nature. Liquidity ratios can help you only for a short duration. Here are reasons why rising liquidity ratios cannot prove a sign of presidencies.
The Use
of Resources
When the liquidity ratio of a
company grows beyond the 1:1 ratio, many things can be inferred about the
company and its resources. First of all, the ratio proves that the company has
many held up resources. It shows that the firm’s resources are tied in the
wrong places. If the company has better management skills, it could have used
resources in a more fruitful and profitable manner. According to experts,
rising liquidity ratios can state that the management has held up resources
idle.
A Fair Judgment
For a company to be successful,
they should have very little or no signs of liability. Their liquidity ratio
should be within acceptable margins to make sure the company is performing
well. There are many ways to check the performance of a firm. Conversely, a
rise in liquidity ratio is not the best. This ratio alone is not sufficient to
analyze or show how a firm is
performing. After all, it is a number that doesn’t signify much without proper
interpretations. Regardless of whether the ratio is rising or dropping down,
the company cannot evaluate its performance against the flow. So many other
factors should be taken into consideration for a fair judgment.
When it comes to liquidity ratio
and company performance, cash plays a very important role. The way in which
profits are generated and the way in which resources are used can influence the
firm’s overall growth. However, rise in liquidity ratio alone is not a parameter
for judging the company’s overall sign of prosperity.
SEE ALSO:
