Enter the cash & cash equivalents, marketable securities, accounts receivable, and current liabilities into the calculator to determine the liquidity ratio.

Liquidity Ratio Formula

The following formula can be used to calculate the liquidity of a company. 

LR =(C + S + AR) / L
  • Where LR is the liquidity ratio
  • C is the cash and cash equivalents ($)
  • S is the marketable securities value ($)
  • AR is the accounts receivables ($)
  • L is the total liabilities ($)

To calculate the liquidity ratio, sum the cash, securities value, and accounts receivable, then divide by the total liabilities.

Liquidity Ratio Definition

Liquidity ratio is a financial metric that assesses a company’s ability to meet its short-term obligations using readily available assets. It measures the company’s ability to convert its assets into cash quickly, without incurring significant losses, to cover its upcoming liabilities.

This ratio is crucial for businesses as it provides insights into their financial health and ability to handle financial obligations in the short term.

By understanding the liquidity ratio, stakeholders such as investors, lenders, and suppliers can evaluate a company’s risk profile and make informed decisions about their engagement with the business.

A high liquidity ratio indicates that a company has sufficient liquid assets to meet its short-term liabilities comfortably. This implies a stronger financial position, as the company can readily settle its debts and operational expenses without resorting to external borrowings or selling fixed assets.

A low liquidity ratio indicates a potential risk for a company. Having a smaller proportion of liquid assets in relation to its liabilities means that the company may face difficulties in fulfilling its short-term obligations. This could lead to liquidity constraints, delayed payments to suppliers, or even bankruptcy if the situation persists.

Liquidity Ratio Example

How to calculate the liquidity ratio?

  1. First, determine the cash on hand.

    Calculate the amount of cash and cash equivalents the business has on hand.

  2. Next, determine the marketable securities.

    Calculate the value of all securities that could be sold on short notice.

  3. Next, determine the accounts receivable.

    Measure the total accounts receivable for the year.

  4. Next, determine the total liabilities.

    Calculate the total liabilities.

  5. Finally, calculate the liquidity ratio.

    Using the formula presented above, calculate the liquidity ratio.

FAQ

What is a liquidity ratio?

A liquidity ratio is a measure of how “liquid” a company is. Liquidity measures the ability of a company to pay off its current liabilities within one year. In other words, the ability of a company to meet short-term financial obligations.

Is liquidity ratio and quick ratio the same?

In a sense, yes, the quick ratio formula is used to calculate the liquidity ratio.