learn how to interpret the results obtained

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Absolute liquidity ratio : we move on to a special case in which only the treasury assets are compared with all current liabilities. In this way, the company's capacity to pay its most urgent obligations in the event of unforeseen events is checked.
Working capital liquidity ratio : This indicator is usually shown as a percentage and shows the relationship between the company's net capital and its current liabilities. This allows us to know what proportion of the obligations are covered by the business's working capital.
Defensive liquidity ratio : Finally, we have an indicator that compares liquid assets with the organization's operating expenses. All this with the aim of knowing whether the company can continue to operate without sacrificing other assets.
In general, the calculation of each liquidity ratio is very similar and is based on the same equation, which we will see later.

Each of these variants will yield results that may be greater than one, equal to one, or less than one. However, it is important to note that the analysis of these results varies depending on the type of ratio and the information that the company needs.

How to calculate the liquidity ratio?
Let's quickly look at how each of the liquidity ratios discussed in the previous section can be calculated. They are all based on the general ratio equation, which is calculated as follows:

Liquidity ratio = Current assets / Current liabilities

The equation is as simple as dividing current assets by current liabilities. Now, you need to make sure you have all the correct information when doing the calculation, so that the result is true and reflects the financial health of your business. Let's see what the formula looks like for the other variants:

Acid Test Ratio : Here you have to subtract the inventory (assets in stock) from the rest of the current assets and then divide by current liabilities: Quick Liquidity Ratio = (Current Assets - Inventory) / Current Liabilities
Absolute Liquidity Ratio – Now the calculation is based on using only the treasury assets i.e. cash on hand and funds in banks. Again this is divided by current liabilities: Absolute Liquidity Ratio = Treasury Assets / Current Liabilities
Working Capital Liquidity Ratio : In the numerator of the formula we use net equity, i.e. assets minus liabilities, and divide the result by current liabilities. To obtain the value in percentage form, we simply multiply the result obtained by 100: Capital Liquidity Ratio = (Current Assets - Current Liabilities) / Current Liabilities
Defensive liquidity ratio : Finally, to calculate this liquidity ratio, you have to put the treasury assets in the numerator and divide them by the operating expenses that the company has daily: Defensive liquidity ratio = Treasury assets / Daily operating expenses
Practical examples of calculation
Here we are going to present three simple cases in which we will calculate the general liquidity ratio for three hypothetical companies, and then .

Company #1
The financial data on current liabilities and assets can be obtained in this table:

Current assets Current liabilities
Cash and banks = €50,000 Accounts payable = €50,000
Accounts receivable = €100,000 Loan payment = €20,000
Inventories = €150,000 Taxes payable = €30,000
Total = €300,000 Total = €100,000
From the totals we have sufficient data to calculate the liquidity ratio:

Liquidity ratio - Company no. º1 = €300,000 / €100,000 = 3

The result is greater than 1, so we can say that the company has good solvency, although the result is higher than ideal due to an excess of assets.

Company No. 2
For the second case, we have these values:

Current assets Current liabilities
Cash and banks = €20,000 Accounts payable = €120,000
Accounts receivable = €50,000 Loan payment = €50,000
Inventories = €130,000
Total = €200,000 Total = €170,000
The calculation is done with the same equation:

Liquidity ratio - Company #2 = €200,000 / €170,000 = 1.18

We also obtained a result greater than 1, so it is understood that the company is solvent. However, it can also be seen that it may have problems if some unforeseen events occur.

Company No. 3
Finally, for the third company we have the following financial statement:

Current assets Current liabilities
Cash and banks = €10,000 Accounts payable = €120,000
Accounts receivable = €30,000 Loan payment = €40,000
Inventories = €80,000 Taxes payable = €30,000
Total = €120,000 Total = €190,000
The calculation is done with the same equation:

Liquidity ratio - Company no. º3 = €120,000 / €190,000 = 0.63

Finally, we can see a negative result for this company, since its list of brazil cell phone number liquidity ratio is less than 1, indicating that they have no possibility of covering their short-term obligations.

What is the ideal liquidity ratio?
Looking at the above examples, we may wonder what the appropriate range for the liquidity ratio is. It is generally accepted that a ratio between 1.5 and 2.5 is quite suitable for various companies.

However, this will change depending on the sector in which your business is located, that is, the economic activity you carry out. Here are some examples:

Product manufacturing companies often work with high inventory levels, which can increase their overall ratio, but at the same time have a lower quick liquidity ratio.