The liquidity ratios measure the ability of a firm to satisfy its short-term obligations as they become due for payment. In fact, liquidity is a pre-requisite for the very survival of a firm. The short – term creditors of the firm are interested in the short- term solvency or liquidity of a firm. But liquidity implies, from the view point of utilization of the funds of the firm that funds are idle or they earn very little. A proper balance between the two contradictory requirements, that is, liquidity and profitability, is required for efficient financial management. The liquidity ratios measure the ability of a firm to meet its short- term obligations and reflect the short – term financial strength / solvency of a firm. The ratios which indicate the liquidity of a firm are current ratios, quick ratios, cash ratio and net working capital to total assets ratio. Current Ratio
The current ratio is the ratio of total current assets to total current liabilities. It is calculated by dividing the current assets by current liabilities. The current ratio of a firm measures its short -term solvency, that is, its ability to meet short - term obligations. The higher the current ratio, the more is the firm’s ability to meet current obligations and greater is the safety of funds of short – term creditors. | 2005| 2006| 2007| 2008| 2009|
Janata Bank Ltd.| 1.00 : 1| 1.00: 1| 1.00: 1| 1.00: 1| 1.01: 1|
The graph shows that from 2005 to 2008, current ratio of Janata Bank Limited is constant. In the year 2009, current ratio becomes a little bit higher than the preceding years. Although it increases liabilities, but it is relatively lower than the increase in current assets. Comment
Since, the current ratio of Janata Bank Limited is higher in 2009 it indicates the bank is able to meet its current obligations from its current assets. Therefore, it can be said that the financial position of the bank is satisfactory. Quick Ratio
The quick ratio is the ratio between quick current assets and current liabilities and is calculated by dividing the quick assets by the current liabilities. It is a measurement of a firm’s liability to convert its current assets quickly into cash in order to meet the current liabilities. Generally, quick ratio of 1:1 is considered satisfactory as a firm can easily meet all current claims. | 2005| 2006| 2007| 2008| 2009|
Janata Bank Ltd.| 1: 1| .99: 1| .99: 1| .98: 1| .99:1|
It is seen from the graph that the ratio Janata Bank of Limited is lower in 2006 and 2007 and than in 2005 because of an increase in total current liabilities and prepaid expenses as well. In 2008 the ratio of the bank again becomes lower in a significance of increase total current liabilities and prepaid expenses more than total current assets. In 2009 there is an increase in the ratio because of an increase in total current assets more than the increase in total current liabilities. Comment
Quick ratio of Janata Bank of Limited is higher in 2009 and it is almost equal to standard which indicates that the bank is financially sound and able to meet short term obligations from its most liquid assets.
The cash ratio is the most rigid liquidity ratio used to measure a company's ability to cover liabilities in the short term. Since cash is the most liquid, and can be utilized by the company almost immediately, it can be used to pay liabilities at a moments notice. The cash ratio should be at least 1.0 for any company, showing they can at least pay their liabilities if they had to. An increasing cash ratio is a positive sign, showing that the company is better able to cover its obligations to creditors.
| 2005| 2006| 2007| 2008| 2009|
Janata Bank Ltd.| .09×| .07×| .12×| .12×| .11×|
The graph exhibits that the ratio Janata Bank of Limited is lower in 2006 than in 2005 because of an...