Liquidity is the ability to meet obligations that fall due within a year: supplier invoices, payroll, taxes, the current portion of loans. A profitable company can still fail if cash arrives too slowly, which is why bankers check liquidity ratios before they look at anything else. Enter the main current assets and liabilities below to get five ratios and net working capital in one pass.
How to use the liquidity ratios calculator
- Enter cash and cash equivalents, marketable securities, accounts receivable, inventory and any other current assets such as prepaid expenses.
- Enter current liabilities: everything due within twelve months.
- Optionally add annual operating cash flow (from the cash flow statement) and cash operating expenses for the cash-flow ratio and the defensive interval.
- The current ratio appears on the tape; the table explains every ratio and what the value suggests.
Liquidity ratio formulas
The ratios form a ladder from generous to strict. The current ratio counts every current asset, the quick ratio drops inventory and prepaids, and the cash ratio keeps only money that is already in hand.
Worked example
A distributor has $40,000 of cash, $15,000 of marketable securities, $65,000 of receivables, $90,000 of inventory and $10,000 of prepaid expenses — $220,000 of current assets — against $120,000 of current liabilities.
Current ratio = 220,000 ÷ 120,000 = 1.83
Quick ratio = (40,000 + 15,000 + 65,000) ÷ 120,000 = 1.00
Cash ratio = 55,000 ÷ 120,000 = 0.46
Net working capital = 220,000 − 120,000 = $100,000
With $438,000 of yearly cash expenses ($1,200 a day), the defensive interval is 120,000 ÷ 1,200 = 100 days.
The business covers its short-term bills comfortably, but the quick ratio of exactly 1.0 shows it depends on collecting receivables on time. Nearly half of current assets are inventory.
Interpreting liquidity ratios
| Ratio | Weak | Typical | Strong |
|---|---|---|---|
| Current ratio | Below 1.0 | 1.2 – 2.0 | 2.0 – 3.0 |
| Quick ratio | Below 0.5 | 0.7 – 1.0 | Above 1.0 |
| Cash ratio | Below 0.2 | 0.2 – 0.5 | Above 0.5 |
| Operating cash flow ratio | Below 0 | 0.4 – 1.0 | Above 1.0 |
These bands are rules of thumb. Business models matter more than any single benchmark: a software company with annual prepaid subscriptions carries large deferred revenue (a current liability) that it will settle by delivering service, not cash.
Common mistakes
- Year-end window dressing. Paying down payables just before the balance sheet date flatters the current ratio. Compare several quarters.
- Receivables quality. A receivable that is 120 days past due is not liquid. Check the aging schedule, or use the efficiency ratios calculator to see days sales outstanding.
- Too much liquidity. Cash earning nothing drags down return on assets. A current ratio of 5 is often a capital-allocation question rather than a safety win.
For long-term solvency, combine these results with the debt ratios calculator.
Results are estimates based on the figures you enter and are meant for analysis and education, not as a credit decision or investment advice.
Frequently asked questions
What is a good current ratio?
A current ratio between about 1.5 and 3 is generally considered healthy. Below 1.0 means current liabilities exceed current assets. Very high ratios can signal idle cash or slow-moving inventory rather than strength.
Why does the quick ratio leave out inventory?
Inventory has to be sold, and often sold on credit, before it turns into cash, and in a downturn it may only sell at a discount. The quick ratio keeps only cash, marketable securities and receivables, so it tests whether the company could pay its current bills without relying on sales.
Can a company with a current ratio below 1 be healthy?
Yes. Supermarkets, restaurants and subscription businesses collect cash from customers before they pay suppliers, so they often run current ratios below 1 without trouble. The cash conversion cycle explains why.
What is net working capital?
Net working capital is current assets minus current liabilities in dollars. It shows the size of the short-term cushion, while the current ratio shows the same relationship as a proportion.
What is the defensive interval ratio?
It estimates how many days a business could keep paying its cash operating expenses using only quick assets, with no new revenue. It is quick assets divided by daily cash operating expenses.