How to use Liquidity Ratios - Quick Ratio & Current Ratio

Key Note Company Reports contain Liquidity Ratios for all UK companies which provide relevant accounting data to Companies House. These Ratios are also provided in our Benchmarking Reports for a Market, where we list down the main companies active in a market area and give there financial data and ratios for comparison.

A guide on what Liquidity Ratios are and how to use them is given below

Quick ratio

A measure of short-term liquidity less the value of stocks held by a company.

Current assets-inventory / Current liabilities

This should ideally be greater than 1, although in an industry of fast turnover a ratio of under 1 is considered good. The higher the ratio the more capable the company is in paying its debts when they are due. Lower than 1 suggests a company may struggle in making payments such as loan repayments, suppliers, tax bills, etc if they are due at that point. If a company has long inventory turnover periods this could lead to liquidity problems

Current ratio

The short-term balance between assets and liabilities due within one year, measuring a company’s ability to meet payments due.

Total current assets / Total current liabilities

This should also ideally be greater than 1. A higher ratio indicates financial integrity.