Financial Statements are very important documents for the organization. They provide the overview of the financial condition of the company through information such as Balance Sheet, Income Statement, Cash flow Statement, Statement of retained earnings etc.
Financial Statements actually do provide the essential information based on which we can determine the liquidity of the company. Liquidity Ratios are the tools used for this purpose. The first Liquidity ratio is Current Ratio which is calculated by dividing the Total current assets with the Total current liabilities. If the answer is 1 or more than 1 than the company is liquid.
The next Liquidity Ratio is Quick Ratio. This is calculated by Dividing the Total Assets -Inventory with Total Liabilities. The answer must be 1 or more than 1.
Another Liquidity Ratio is Debt to Equity Ratio that calculates the leverage of the company against the debt.