Liquidity ratios measure a business’s ability to pay off its short-term debts using its current or liquid assets. These are crucial for understanding the company’s short-term financial health.
Current Ratio = Current Assets / Current Liabilities
Shows whether the company has enough current assets to cover its current liabilities (due within one year).
If a company has ₹2,00,000 in current assets and ₹1,00,000 in current liabilities:
Current Ratio = 2,00,000 / 1,00,000 = 2.0
✔️ A current ratio of 2.0 means the company has ₹2 in assets for every ₹1 in liabilities.
📌 Ideal Range: Typically between 1.5 and 2.5, but it varies by industry.
Quick Ratio = (Current Assets – Inventory – Prepaid Expenses) / Current Liabilities
OR
Quick Ratio = Quick Assets / Current Liabilities
A stricter test of liquidity — shows if the company can meet short-term obligations without relying on selling inventory.
Quick Ratio = (2,00,000 – 50,000) / 1,00,000 = 1.5
✔️ A quick ratio of 1.5 is considered healthy.
📌 Ideal: 1.0 or above (depends on industry)
Cash Ratio = (Cash + Cash Equivalents) / Current Liabilities
The most conservative liquidity ratio — measures whether a company can pay off current liabilities only with cash and near-cash items.
Cash Ratio = 80,000 / 1,00,000 = 0.8
✔️ Means the company can cover 80% of its short-term debts with cash.
📌 Ideal: 0.5 to 1.0 is considered reasonable, but again, this varies by industry.
| Ratio | Formula | Ideal Value | Measures |
|---|---|---|---|
| Current Ratio | Current Assets / Current Liabilities | 1.5 – 2.5 | Overall short-term solvency |
| Quick Ratio | (Current Assets – Inventory) / Current Liabilities | 1.0+ | Liquidity without relying on inventory |
| Cash Ratio | (Cash + Equivalents) / Current Liabilities | 0.5 – 1.0 | Most conservative liquidity measure |
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