The liquidity ratios compare different groups of current assets with a company's current liabilities. The current ratio divides all current assets by current liabilities: a value of 2 means that current assets are twice the amount of current liabilities.
CurrentRatio > 2
How are the current, quick and cash ratios calculated?
All three ratios use current liabilities as the denominator, but include different groups of assets in the numerator:
| Ratio | Calculation |
|---|---|
| Cash ratio | (cash and equivalents + short-term investments) / current liabilities |
| Quick ratio | (cash and equivalents + short-term investments + receivables) / current liabilities |
| Current ratio | current assets / current liabilities |
Moving from the cash ratio to the quick ratio and then the current ratio adds assets that take longer to turn into cash: first receivables, then inventory and other current assets. On the balance sheet, current usually means due or convertible into cash within a year. The difference between current assets and current liabilities is called working capital; the Altman Z-score uses it.
Operating cash flow to current liabilities
Operating cash flow / current liabilities
The liquidity ratios compare balances at a single date. The operating cash flow ratio divides operating cash flow over the last four quarters by current liabilities: a value of 0.5 means that annual cash flow from operations equals half the amount of current liabilities.
Calculating liquidity ratios: an example
The fictional Example Company, amounts in EUR million:
| Cash and equivalents | 600 |
|---|---|
| Short-term investments | 200 |
| Receivables | 900 |
| Inventory and other current assets | 1,300 |
| Current assets | 3,000 |
| Current liabilities | 2,000 |
| Cash ratio | (600 + 200) / 2,000 = 0.40 |
| Quick ratio | (600 + 200 + 900) / 2,000 = 0.85 |
| Current ratio | 3,000 / 2,000 = 1.50 |
| Operating cash flow of the last four quarters | 1,200 |
| Operating cash flow to current liabilities | 1,200 / 2,000 = 0.60 |
A current ratio of 1.50 means that the company has EUR 1.50 of current assets for each euro of current liabilities, equivalent to 150% coverage. These assets are not necessarily all available as cash immediately.
What are the limits of liquidity ratios?
- The balance sheet is a snapshot. Liquidity can vary considerably between reporting dates, for example in a seasonal business.
- Inventory and receivables cannot always be turned into cash quickly and at book value. That is why there are the stricter quick and cash ratios.
- Unused credit lines are not on the balance sheet; the liquidity ratios do not take them into account.
- Typical values depend on the business model: retailers whose customers pay immediately while they pay their suppliers later often have low liquidity ratios.
- A higher ratio means greater coverage of current liabilities. It can also result from a fall in liabilities. Large inventories or receivables can tie up substantial capital.
Using liquidity ratios as your own criteria
The preset criterion “Current ratio greater than 2” checks this condition:
CurrentRatio > 2
The example strategy “Example: Liquidity ratios (2 of 3)” in the demo requires at least two of three criteria: this
one, CashRatio > 0.5 and OperatingCashFlowToCurrentLiabilities > 0.5. The Example
Company meets only the third criterion, so it does not meet the strategy. The guide on
required criteria explains how such
strategies work.
You set the limits yourself; they are examples, not a recommendation.
Which balance sheet items does Critivest use?
Balance sheet values come from the latest balance sheet. If an item is missing, Critivest uses the most recent available value from the preceding three quarters. If it is missing there too, as can happen with short-term investments, the affected ratio is unavailable; Critivest does not replace the missing item with zero. Operating cash flow is summed over the last four quarters. If four complete quarters are unavailable, Critivest uses the total for the latest fiscal year.
Banks and insurers usually do not divide their balance sheets into current and non-current items. If current assets or current liabilities are missing, the liquidity ratios are not available.
Periods and missing values: Methodology.
Formula reference in Critivest
Name in conditions: CurrentRatio
CurrentRatio = TotalCurrentAssets / TotalCurrentLiabilitiesTotal current assets divided by total current liabilities
Name in conditions: QuickRatio
QuickRatio = (CashAndEquivalents + ShortTermInvestments + Receivables) / TotalCurrentLiabilitiesCash and equivalents plus short-term investments and receivables divided by total current liabilities
Name in conditions: CashRatio
CashRatio = (CashAndEquivalents + ShortTermInvestments) / TotalCurrentLiabilitiesCash and equivalents plus short-term investments divided by total current liabilities
Name in conditions: OperatingCashFlowToCurrentLiabilities
OperatingCashFlowToCurrentLiabilities = OperatingCashFlow / TotalCurrentLiabilitiesOperating cash flow of the last four quarters divided by latest total current liabilities
Names used in conditions
TotalCurrentAssets- Balance sheet: Current assets
TotalCurrentLiabilities- Balance sheet: Current liabilities
CashAndEquivalents- Balance sheet: Cash and cash equivalents
ShortTermInvestments- Balance sheet: Short-term investments
Receivables- Balance sheet: Receivables
OperatingCashFlow- Cash flow, last 4 quarters or fiscal year: Operating cash flow
Related formulas
- Debt-to-equity ratio: The debt-to-equity ratio relates a company's liabilities to its equity. How Critivest calculates it from the latest balance sheet.
- Altman Z-score: The Altman Z-score combines ratios from the balance sheet and income statement into one value for the risk of financial distress. Plus the Z″-score.
Sources
- Liquidity Ratios, OpenStax: Principles of Finance (formulas and interpretation)
- Ratio analysis, ACCA (liquidity ratios and operating cash flow)
Last updated: November 4, 2026