One way a business can manage its books and its viability, in both the near and the
long term, is to look at how liquid its assets are. Companies with better cash
positions are naturally better placed to sustain themselves — and healthy
liquidity improves the odds of meeting short-term debts as they fall due. Below are
four common ways to measure it.

Current ratio

The current ratio, also called the working capital ratio, shows how well a business
can satisfy obligations due within twelve months.

Current Ratio = Current Assets ÷ Current Liabilities

Current assets include cash, accounts receivable, prepaid expenses, office supplies,
saleable inventory, and marketable securities such as stocks, bonds or purchase
agreements maturing within twelve months. Current liabilities include outstanding
bills and accounts payable, short-term debt, interest payable, and income and payroll
taxes payable.

If a business has current assets of $250 million against current liabilities of
$75 million, the ratio is 250 ÷ 75, or 3.33. At that level the company is in
good health — it can clear its short-term debts comfortably.

Acid-test ratio

The acid-test ratio, also called the quick ratio, measures whether a company can
pay short-term liabilities using only assets that convert easily to cash.

Acid-Test Ratio = (Current Assets − Inventories) ÷ Current Liabilities

Current assets here mean cash and near-cash holdings — savings and checking
accounts, deposits becoming liquid within three months, marketable securities and
accounts receivable. Value the inventory intended for sale, subtract it from current
assets, and divide by liabilities due within twelve months.

Because it excludes inventory, this ratio shows whether a company could meet its
obligations without selling stock or borrowing more — which many would argue
gives a truer picture of financial fitness.

A ratio of 3 means the business holds $3 for every $1 of liabilities. But a rising
quick ratio is not automatically good news: it can indicate cash sitting idle rather
than being reinvested, or a build-up of receivables that are owed but uncollected.

Cash ratio

The cash ratio, or cash asset ratio, measures the ability to satisfy short-term
liabilities using cash and cash equivalents alone.

Cash Ratio = Cash and Cash Equivalents ÷ Current Liabilities

Cash means physical currency, minted coins and checks. Cash equivalents include
money market accounts, Treasury bills and anything convertible to cash almost
immediately. Current liabilities are accrued liabilities, short-term debt and accounts
payable falling due within the year.

With cash of $25,000 plus equivalents of $100,000, against accounts payable of
$30,000 plus short-term debt of $25,000, the calculation is $125,000 ÷ $55,000
= 2.27. The company could cover 227% of present liabilities from cash alone. Creditors
read that as room to lend; investors read it as evidence of how liquidity is being
managed.

Operating cash flow ratio

This one measures how efficiently a business can meet current liabilities from the
cash its core operations generate — how many times over it could clear its
obligations from a given period’s cash.

Operating Cash Flow Ratio = Cash Flow from Operations ÷ Current Liabilities

Cash flow from operations comes from the statement of cash flows, or can be derived
from net income plus non-cash expenses plus changes in working capital.

A ratio of 1.5 or 2 means the business can cover its present liabilities one and a
half or two times over. Below 1, operations are not generating enough cash to meet
short-term liabilities — which is the number worth watching.

Why it matters

Run as part of regular practice, these four ratios show where a business is holding
too little liquidity, or too much, and give it the chance to act before either becomes
a problem.