Liquidity indicators: how to assess a company's financial stability

Liquidity ratios are key financial tools for analyzing an organization's ability to meet short-term financial obligations. They allow investors and analysts to understand how quickly a company can convert assets into cash to pay off debts. Essentially, the current liquidity ratio and its equivalents reflect financial stability during a crisis.

Why Liquidity Indicators are Needed

When a company faces financial difficulties, liquidity ratios help answer the main question: are there enough assets to meet liabilities? These indicators are not just numbers, but a real assessment of the financial health of the organization.

Three main types of coefficients

Current liquidity ratio: the first line of defense

This is the most common and easiest indicator to calculate. The current liquidity ratio determines how many times the company's current assets exceed its current liabilities.

Formula: current assets / current liabilities

A value greater than 1 indicates that the company has sufficient liquid resources. If the ratio falls below 1, it is a signal of potential problems with covering liabilities.

Quick liquidity ratio: a stricter assessment

This indicator, also known as the “acid test,” excludes inventory from the calculation, as it is more difficult to quickly convert it into cash.

Formula: (cash + market securities + accounts receivable) / current liabilities

The quick liquidity ratio provides a more conservative but more realistic picture than the current liquidity ratio.

Absolute Liquidity Ratio: maximum caution

The strictest measure that takes into account only the available cash.

Formula: cash / current liabilities

It shows the minimum percentage of obligations that the company can settle immediately.

How to interpret the results

One is the threshold value for all coefficients:

• Ratio = 1: Assets exactly match liabilities. The company is in a neutral position.
• Ratio > 1: Optimal situation. The company has a capital buffer and can comfortably meet its obligations even with unexpected expenses.
• Coefficient < 1: Warning signal. The company may face difficulties in repaying short-term debts.

Comprehensive Approach to Analysis

Liquidity ratios are just part of financial analysis. For a complete picture, it is necessary to compare these indicators with:

• Historical data of the company over several years
• Industry average indicators
• Competitors' indicators
• Other financial metrics (profitability, asset efficiency)

A comprehensive assessment will allow investors to make informed decisions and avoid hasty conclusions based solely on one indicator.