# Operating Efficiency and Liquidity Position
## Operating Efficiency (Activity / Turnover Ratios)
Ratio analysis throws light on the degree of efficiency with which management uses and utilises its assets.
- Activity ratios = turnover ratios that measure operational efficiency.
- They show the frequency of sales in relation to assets — capital assets, working capital, or average inventory.
- A firm's solvency ultimately depends on sales revenues generated by use of its assets (total and component-wise).
## Liquidity Position
Liquidity ratios reveal whether a firm can meet its current obligations when they fall due.
### Importance
- Inability to pay short-term liabilities damages credibility and credit rating.
- Continuous default leads to commercial bankruptcy, which can trigger sickness and dissolution.
### Key Liquidity Ratios
| Ratio | Formula |
|---|---|
| Current Ratio | Current Assets / Current Liabilities |
| Liquid (Quick) Ratio | (Current Assets − Inventory − Prepaid) / Current Liabilities |
| Cash to Current Liability Ratio | Cash & Equivalents / Current Liabilities |
### Who Uses Them?
Particularly useful in credit analysis by banks and other suppliers of short-term loans.