Liquidity Check: The Three Most Important Formulas for Your Financial Analysis

If you want to quickly assess the financial health of a company, there is no way around liquidity ratios. These metrics show you how well a company can meet its short-term debts – and that is exactly what interests investors and lenders the most.

Why are liquidity ratios so important?

Liquidity ratios answer a central question: Does the company have enough liquid assets to pay its bills? They measure not only the short-term financial performance but also provide you with an overview of the overall economic stability. For investors, they are essential to properly assess risks and make better decisions.

Important to know: A single ratio is not enough to get a complete picture. You should always analyze multiple metrics together.

The Three Liquidity Formulas in Detail

1. Circulation rate – The basic measure

The liquidity ratio is the most widely used metric. It shows you how much current assets a company has available to cover short-term liabilities.

Formula of the circulation ratio: Current assets ÷ short-term liabilities

The higher this value, the better the liquidity position. A ratio of 2.0, for example, means that the company has double the amount of assets to service its debts.

2. Quick Ratio – The stricter criterion

The Quick Ratio ( also known as “Acid Test Ratio” or “liquidity ratio of the second degree” ) is more critical than the current ratio. It only takes into account the most liquid assets and excludes inventories – as these cannot be converted into cash quickly enough.

Formula of the Quick Ratio: (Cash + marketable securities + receivables) ÷ short-term liabilities

This ratio gives you a more realistic picture when a company needs money quickly.

3. Cash Ratio – The most conservative model

The cash ratio is the strictly measured liquidity ratio. It considers only cash and is therefore the most conservative method of assessing solvency. It is also referred to as “cash liquidity” or “first-degree liquidity.”

Formula of the Cash Ratio: Cash ÷ short-term liabilities

This is how you interpret the results correctly

The liquidity formulas give you concrete numerical values – but what do these mean?

• Value = 1: The company has exactly as many assets as liabilities. A tight situation.
• Value < 1: Warning signal – the company does not have enough assets to pay all debts in the short-term.
• Value > 1: This is ideal. The company can easily meet its liabilities.

However: Do not use these ratios in isolation. Always compare them with industry standards, the company's historical data, and other financial metrics. This way, you can identify trends and get an accurate picture of economic solidity.