## Why liquidity ratios are key to assessing financial health?

The **liquidity ratios** represent fundamental indicators for understanding a company's financial stability. Through these metrics, it can be determined whether an organization has sufficient resources to meet its short-term obligations, essential information for any investor looking to make decisions based on concrete data.

## The three main metrics for measuring payment capacity

There are three widely used liquidity indicators that reveal a company's ability to meet its short-term debts. However, it is crucial to remember that these indicators should be analyzed in conjunction with other financial metrics to obtain a complete picture.

### Current ratio: the most common indicator

The **current ratio** assesses the relationship between available short-term assets and liabilities that will come due in the same period. A higher figure suggests a stronger position from a liquidity standpoint.

**Formula:** _Current Assets ÷ Current Liabilities_

### Quick ratio or acid test: a more conservative measure

Also known as **acid test**, the quick ratio examines the company's ability to meet its obligations using only its most liquid assets. This metric excludes inventory, considering it less convertible into cash.

**Formula:** _(Cash + Marketable securities + Accounts receivable) ÷ Current liabilities_

### Cash ratio: the strictest criterion

The **cash ratio** takes a more restrictive approach, considering only the cash available on hand. It is the most conservative indicator of the three.

**Formula:** _Available Cash ÷ Current Liabilities_

## Correct Interpretation of Liquidity Ratios

For these indicators to be truly useful, it is essential to interpret them correctly. When the result is exactly one, it means that the company has assets equivalent to its immediate obligations. A value below one indicates a shortage of resources, while a value above suggests a comfortable capacity to meet debts.

The most favorable situation occurs when the ratio exceeds one, demonstrating that the organization can meet its commitments without difficulty. However, a deep analysis requires examining these **liquidity ratios** alongside other financial indicators, industry benchmarks, and the company's historical performance to gain a comprehensive understanding of its strength and stability.