How to Calculate the Financial Liquidity Ratio

Liquidity ratios help companies and investors evaluate the companies' ability to pay short-term financial obligations such as debt payments, bond payments or operating costs. Three ratios commonly used to evaluate this liquidity are the current ratio, the quick ratio and the cash ratio. The cash ratio is the most conservative evaluation method, and the current ratio is the least conservative method used to evaluate a company's liquidity.

Instructions

1. Divide the value of the current assets by the value of the current liabilities. For example, assume a business has $2,000,000 in assets and $500,000 in liabilities. $2,000,000 / $500,000 = 4. This figure represents the current liquidity ratio.

2. Subtract the value of a company's inventory from the company's current assets. For example, assume a company has $2 million in assets and $200,000 in inventory. $2 million - $200,000 = $1,800,000. Divide this figure by the current liabilities of the company. For example, assume the company has $500,000 in liabilities. $1.8 million / $500,000 = 3.6. This figure represents the quick liquidity ratio for the company.

3. Add the value of marketable securities held by the company to the cash the company has on hand. For example, assume a business has $1 million cash on hand and holds marketable securities of $500,000. $1 million + $500,000 = $1.5 million. Divide this figure by the current liabilities of the company. For example, assume the company has $500,000 in liabilities. $1.5 million / $500,000 = 3. This figure represents the cash liquidity ratio for the company.

References

• "Principles of Finance"; Scott Besley and Eugene Brigham; 2008
• NetMBA: Financial Ratios