Question
Which of the following is classified as a liquidity
ratio?Solution
Liquidity ratios assess a company’s ability to meet its short-term obligations using its short-term assets. Among the given options: • Net Working Capital (NWC) = Current Assets – Current Liabilities. o A positive NWC indicates that the company can comfortably meet short-term obligations, making this a liquidity measure. Other ratios listed serve different purposes: • Equity ratio → A solvency ratio showing the proportion of assets financed by equity. • Proprietary ratio → A solvency ratio measuring shareholders’ funds as a percentage of total assets. • Capital Gearing ratio → A leverage ratio comparing fixed interest/dividend bearing funds with equity. • Debt–Equity ratio → A solvency ratio showing the balance between debt and equity financing. Thus, the correct liquidity ratio is Net Working Capital.
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