Liquidity Ratios (Current Ratio, Quick Ratio, and Others)

Liquidity is a measure of how quickly a firm is able to convert its assets into cash. While analyzing the liquidity position of a company, an analyst uses the common liquidity ratios to measure the company’s ability to pay-off its short-term liabilities.

There are four important liquidity ratios:

• Current Ratio
• Quick Ratio
• Cash Ratio
• Defensive Interval Ratio

All these ratios compare the company’s short-term assets with its short-term liabilities, however, make use of short-term assets with varying levels of liquidity.

We will take a simple example to understand these ratios. Let’s say that we have the following data for a company.

Current Assets		Current Liabilities
Cash	$20,000	Total Current Liabilities	$110,000
Short-term Marketable Securities	$20,000
Receivables	$60,000
Inventory	$40,000
Total Current Assets	$140,000		$110,000

Let’s calculate the liquidity ratios using this data.

Current Ratio

$Current\ Ratio = \frac{Current\ Assets}{Current\ Liabilities}$