Liquidity Ratios

Categories: Metrics, Trading

See: Current Ratio. See: Quick Ratio.

These ratios ask, "How cash-comfy are you to continue operations?" More or less.

When a company has way more cash than they do debt, they have high liquidity. When they have more current assets, i.e. assets ready to sell (easily) than they do interest payments, then they are liquid.

High liquidity ratios, good; low liquidity ratios, bad.

Related or Semi-related Video

Finance: What is liquidity preference?27 Views

00:00

finance a la shmoop. what is liquidity preference?

00:06

yeah well liquidity is a good thing you want it. being liquid means that you have

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cash which gives you options to you know buy stuff. and yeah even the Amazon River [money leaves a wallet in the grocery store]

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shops at Amazon. all right so if your flavor of

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investment has a liquidity preference over someone else's then your investment

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all else being equal is preferable. see the liquidity preference . specifically if

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you have liquidity preference and usually this is found in the form of

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early stage of venture capital investor term sheets for investing in companies

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in the form of convertible preferred stock- like it converts into common at

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the IPO or something like that- then you get paid before everyone else

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gets paid -at least in this form of stock- if the company gets sold.

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all right well technically that is, but the company is sold and your convertible

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preferred hasn't converted into common shares yet this company didn't go public. [convertible stock made into common stock]

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but so like let's think about the example where if the company raised

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twelve million bucks in preferred stock, which all had a liquidity preference

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over and above common ,and then the whole company was sold for just fifteen

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million dollars. well then those with liquidity preference would get liquid

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first .ie they get their twelve million bucks. then the remaining three million

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would be sprinkled around everyone else who was do the dough. plus any dividends

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or accrued assets that have come our way otherwise. and yes technically debt

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holders get paid ahead of the various series preferred investors who then get [list of who gets paid first]

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paid ahead of the common shareholder but that's a different video. all right so

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when it comes down to it you want to have liquidity preference. clearly I

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prefer to be liquid myself. [man floats in lake in an inner tube]

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