Liquidity Ratio

Liquidity ratios assess a company's ability to meet its short-term obligations and manage cash flow efficiently. The current ratio is a commonly used liquidity ratio. It is calculated by dividing current assets by current liabilities (Hayes, 2023).

Current Ratio = Current Assets / Current Liabilities

In this case, the current assets are $48,585, and the current liabilities amount to $1,268,266.

Current Ratio = $48,585 / $1,268,266 = 0.038

The current liquidity ratio of 0.038 indicates that the company has a very low ability to meet its short-term obligations. A current ratio below 1 suggests that the company may face challenges in meeting its obligation.

Any current ratio below 1 is generally considered inadequate across all industries. In the retail clothing industry, a benchmark ratio of 1.5 to 3 is considered healthy for a business.

Recommendation: To improve liquidity, the company should focus on increasing its current assets and decreasing its current liabilities. Strategies such as improving cash flow management, negotiating better payment terms with suppliers, and enhancing debt collection procedures could be implemented.

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