Knowing how to analyze a company's financial statements to determine the strength of the company is key for investors and journalists alike. Learn how to gauge a company's liquidity using current and quick ratios in this Slideshare from Sageworks Institute. View the entire blog at www.sageworksinstitute.org/blog

1. GAUGING A COMPANY’S LIQUIDITY
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2. WHAT ARE THE BEST METRICS?
There are two key liquidity metrics used to
measure a company’s ability to meet near-term
obligations:
• Current Ratio
• Quick Ratio

3. WHERE ARE THEY FOUND?
• The information needed to calculate a
company’s current and quick ratio can be found
on the balance sheet.

4. CURRENT RATIO
Current Assets
Current Liabilities
Current Ratio =
Current Ratio indicates the amount of liquid assets a business has available to pay off its
current liabilities. In other words, it tells you whether or not the liquid assets (those
easily converted to cash) a company holds are enough to cover the short-term liabilities.
The higher the current ratio, the greater the company’s liquidity.
A ratio of < 1 means the company could run short of cash within the next year

5. CURRENT RATIO LIMITATIONS:
• Since inventory is included in the calculation
for total current assets, current ratio could
provide a distorted understanding of very
short-term cash flow
• Why? The company may not be able to convert inventory into
cash quickly if urgently necessary

6. QUICK RATIO
Cash + A/R
Current Liabilities
Quick Ratio =
Quick ratio only measures cash and accounts receivable (it doesn’t take into account
inventory like current ratio does).
The higher the quick ratio, the stronger the company’s cash position
A ratio of >1 means the company has enough cash to pay current obligations

7. QUICK RATIO CON’T…
• Quick ratio is a better measure of a company’s
very short-term cash position
• Measures liquidity by considering only readily
liquid assets

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