If a city's Liquidity Ratio is 9:1, what does it indicate?

Expert Solution

Liquidity ratio refers to the ability of the entity to meet it's current debt obligations without resorting to external financing.Liquidity ratios include the current ratio which is equal to Current Assets divided by Current Liabilities.Quick ratio which is equal to Quick Assets divided by current Liabilities .The Current liabilities include items like payable ,short term debt etc.Current Assets include items like receivables ,cash and cash equivalents etc.The quick assets refer to the current assets without inventory since inventory has a slower turnover rate.The Quick ratio gives an indication of the entity's immediate liquidity.

A liquidity ratio of higher than 1 is considered ideal.The higher the liquidity ratio the higher will be the safety margin the organization or entity has with regard to it's ability to meet current liabilities.The liquidity ratio of 9:1 indicates that the cities current assets are 9 times more than their current liabilities.It means the city is financially stable and can meet it's current liabilities with ease.

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