How to Calculate Liquidity Ratios: Current and Quick Ratio Formulas
To calculate liquidity ratios, compare a company's short-term assets to its short-term liabilities, which shows its ability to meet immediate obligations. The two most important measures are the current ratio, found by dividing current assets by current liabilities, and the quick ratio, found by subtracting inventory from current assets and then dividing by current liabilities. The current ratio tells you how many times current assets can cover current debts. The quick ratio, also called the acid-test ratio, is a stricter measure because it excludes inventory, a less liquid asset. For exams such as the CFA, users say you need to memorize the common ratio formulas. Most of them become common sense once you know the terminology, since the formula is usually right there in the name.
