How liquid are the firms? Are the firm’s managers generating adequate operating profits on the company’s assets?

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The liquidity of a firm can be assessed by looking at its current ratio and quick ratio. The current ratio is calculated as the total current assets divided by total current liabilities, while the quick ratio is calculated as (total current assets – inventory) / total liabilities. Generally speaking, a higher ratio indicates more liquid firms. Additionally, profitability can be assessed using financial ratios such as return on assets (ROA), which measures how efficiently management is utilizing the company’s resources to generate profits. A ROA greater than 1% typically indicates that managers are generating adequate operating profits on the company’s assets.