Liquidity ratios

Can the business pay the bills due within the next year? Liquidity ratios compare short-term assets with short-term obligations.

Current ratioRatioCurrent assets ÷ Current liabilities
Quick ratioRatio(Cash and cash equivalents + Short-term investments + Accounts receivable) ÷ Current liabilities
Cash ratioRatioCash and cash equivalents ÷ Current liabilities
Working capital NWCMeasureCurrent assets − Current liabilities

Reading liquidity ratios together

Liquidity ratios compare what a business could turn into cash within a year with what it must pay within a year. The current ratio counts every current asset; the quick ratio leaves out inventory, which may take months to sell; the cash ratio counts only cash and cash equivalents. Working capital expresses the same comparison as an amount rather than a ratio.

Read them in sequence, from the broadest measure to the strictest. A business whose current ratio looks comfortable but whose quick ratio is low depends on selling its inventory to pay its bills. Because these ratios use balance sheet figures from a single date, compare several dates, and look at the cash flow statement to see whether day-to-day operations generate cash.

Financial statement map

Choose a line item to see which ratios use it, or choose a ratio to see its line items and the calculation.

Illustrative example company, not actual results. Balance sheet ratios use year-end balances.

Balance sheet (end of year)

Assets

Liabilities and equity

Ratios

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Line items and the ratios that use them (text view)

Current assets: Current ratio (numerator), Working capital
Current liabilities: Current ratio (denominator), Quick ratio (denominator), Cash ratio (denominator), Working capital
Cash and cash equivalents: Quick ratio (numerator), Cash ratio (numerator)
Short-term investments: Quick ratio (numerator)
Accounts receivable: Quick ratio (numerator)