The liquidity ratio or the current ratio is the link of current assets in excess of current liabilities. To such an extent, the relative amount determines interim debit disbursement competency of a company. Obviously, this ratio is a clear marker that the company can pay current liabilities through the stream of money generated by current company assets. Typically, this ratio is known as the working capital which apparently also discloses the fact that the finer ratio means finer interim solvency. The relationship is written as:
Liquidity ratio = Current ratio = Current assets
Current liabilities
(Hunt, Weygandt, Kieso, and Kimmel, 2003).
On the other hand, profitability ratio can be computed using return on assets and return on common stockholders equity. The return on assets ratio is the link of net income in excess of total assets or total chattels. The ratio, which is the relative amount, determines the wide-ranging productivity of employed chattels. To such an extent, the ratio which is likewise the relative amount determines the disposable income. This disposable income or profit is actually the per dollar sales turnover. The relationship is written as:
Profitability ratio = Return on assets = Net income
Total assets
(Hunt, Weygandt, Kieso, and Kimmel, 2003).
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