How to Calculate Liquidity Ratios (2024)

FAQs

How to Calculate Liquidity Ratios? ›

The liquidity ratio is a computation used to measure the ability of the company to pay its short-term debt. It can be calculated by using the current ratio, the quick ratio (or acid-test ratio), and the cash ratio. The current ratio is equal to current assets divided by current liabilities.

Current Ratio = Current Assets / Current Liabilities

The current ratio is the simplest liquidity ratio to calculate and interpret. Anyone can easily find the current assets and current liabilities line items on a company's balance sheet.

To find your company's quick ratio, first add together your cash, accounts receivable, and marketable securities to find your quick assets. Add together your accounts payable and short-term debt to find current liabilities. Then, divide your quick assets by current liabilities to find your quick ratio.

A good liquidity ratio is anything greater than 1. It indicates that the company is in good financial health and is less likely to face financial hardships. The higher ratio, the higher is the safety margin that the business possesses to meet its current liabilities.

Liquidity Risk Calculation Example

Starting with the current ratio, the formula consists of dividing the “Total Current Assets” by the “Total Current Liabilities”.

Liquidity ratios are a measure of the ability of a company to pay off its short-term liabilities. Liquidity ratios determine how quickly a company can convert the assets and use them for meeting the dues that arise. The higher the ratio, the easier is the ability to clear the debts and avoid defaulting on payments.

The liquidity ratio is the result of dividing the total cash by short-term borrowings. It shows the number of times short-term liabilities are covered by cash. If the value is greater than 1.00, it means fully covered.

How to Find the Ratio of Two Numbers? The ratio of two numbers can be calculated using the ratio formula, p:q = p/q.

It may also be used in the context of financial institutions, such as banks. The formula to calculate the overall liquidity ratio is: [Total Assets / (Total Liabilities – Conditional Reserves)]. A low overall liquidity ratio could indicate that the financial institution or insurance company is in financial trouble.

A liquidity ratio is a kind of monetary proportion used to decide an organization's capacity to pay its short-term obligation or commitments. The measurement decides whether an organization can utilize its current, or fluid, resources to cover its present liabilities.

What is a good quick ratio? ›

Generally speaking, a good quick ratio is anything above 1 or 1:1. A ratio of 1:1 would mean the company has the same amount of liquid assets as current liabilities. A higher ratio indicates the company could pay off current liabilities several times over.

The quick ratio, also called an acid-test ratio, measures a company's short-term liquidity against its short-term obligations. Essentially, the ratio seeks to figure out if a company has enough liquid assets (cash or things that can easily be converted into cash) to cover its current liabilities and impending debts.

The Quick Ratio, also known as the Acid-test or Liquidity ratio, measures the ability of a business to pay its short-term liabilities by having assets that are readily convertible into cash. These assets are, namely, cash, marketable securities, and accounts receivable.

The current ratio divides current assets by current liabilities. The quick ratio divides cash and cash equivalents by current liabilities.