Liquidity ratios and efficiency ratios

In this lesson

1. 0:00 Liquidity ratios introduction
2. 0:27 Current ratio explained
3. 1:36 Quick ratio and acid test
4. 2:42 Interpreting liquidity ratios
5. 4:00 Crimson liquidity case study
6. 7:01 Efficiency ratios overview
7. 8:35 Receivables collection period
8. 10:14 Payables payment period
9. 11:32 Working capital cycle and overtrading
10. 13:13 Crimson efficiency assessment

About this lesson

This session covers the practical application of these ratios using worked examples, explains why efficiency ratios should be considered alongside liquidity analysis, and introduces the working capital cycle concept—essential knowledge for FM, MA, and SBL papers. Liquidity ratios measure whether a company can pay its short-term obligations using its current assets. The current ratio compares total current assets to current liabilities, while the quick ratio excludes inventory (the least liquid asset) to give a more conservative view. You'll discover why a high ratio isn't always positive—it can signal poor working capital management—and learn to interpret trends across years rather than comparing absolute figures between companies. Efficiency ratios reveal how well a company manages its working capital. Inventory turnover measures how long stock is held; receivables collection period shows how quickly cash is collected from customers; payables payment period indicates how long the company takes to pay suppliers. Together, these ratios form the working capital cycle, which measures the time between paying suppliers and receiving cash from customers. The session demonstrates how rising inventory days, receivables days, and payables days can indicate overtrading—rapid sales growth without sufficient long-term financing—which creates cash flow problems despite healthy profits.

Duration: 17m