# Operating Efficiency and Liquidity Position Ratios
## A. Operating Efficiency
Ratio analysis throws light on the degree of efficiency in management and utilisation of assets. Activity ratios (also called turnover ratios) measure this operational efficiency.
### Purpose
- Evaluate how effectively the firm manages and utilises its assets.
- Usually indicate the frequency of sales relative to assets.
- Assets analysed may be capital assets, working capital, or average inventory.
### Key Insight
> The solvency of a firm is ultimately dependent upon the sales revenue generated by its assets — both total assets and individual components.
### Common Activity Ratios
- Total Asset Turnover
- Fixed Asset Turnover
- Working Capital Turnover
- Inventory (Stock) Turnover
- Debtors / Receivables Turnover
## B. Liquidity Position
Liquidity ratios help evaluate whether the firm can meet its current obligations as they fall due.
### Why It Matters
- Inability to pay short-term liabilities affects credibility and credit rating.
- Continuous default leads to commercial bankruptcy.
- Commercial bankruptcy may eventually result in sickness and dissolution.
### Key Liquidity Ratios
| Ratio | Formula |
|---|---|
| Current Ratio | Current Assets / Current Liabilities |
| Liquid (Quick) Ratio | (Current Assets - Inventory - Prepaid Exp) / Current Liabilities |
| Cash to Current Liability Ratio | (Cash + Marketable Securities) / Current Liabilities |
### Who Uses Them?
Liquidity ratios are particularly useful in credit analysis by banks and other suppliers of short-term loans.