Ratio analysis
Liquidity ratios
Current, quick and cash ratios — and why a rising current ratio can be bad news.
Learning objectives
- Calculate the current, quick and cash ratios
- Explain which assets each ratio counts as liquid
- Judge whether a change in liquidity is genuine or driven by inventory
Liquidity is the ability to meet obligations falling due within a year. Lenders and suppliers check it first: a profitable company can still fail if it can't pay its suppliers next month.
The three ratios differ in what they count as liquid. The current ratio counts all current assets, including inventory that must first be sold. The quick ratio drops inventory. The cash ratio counts only cash. Liquidity is measured at a point in time, so these ratios use period-end balances.
Current = CA ÷ CL Quick = (Cash + Receivables) ÷ CL Cash = Cash ÷ CL
- CA
- current assets: cash, receivables, inventory
- CL
- current liabilities: obligations due within a year
- Quick
- also includes marketable securities where a company holds them
Included with a Formula Quest membership
The rest of this lesson is for members. Members get the full lesson, including its 3 graded exercises, and every other Finance Quest lesson.