Liquidity Ratio using Excel

Posted on:  08/21/2022
Liquidity Ratio using Excel

A liquidity ratio is a type of Financial Ratio that determines if a company can pay its short-term debt and obligations with its current assets. The higher the liquidity ratio, the better. 

What are Current Assets?

Current Assets consist of cash and other assets expected to be converted to cash within a year. 

Examples of Current Assets:

  1. Cash
  2. Cash Equivalents
  3. Accounts Receivable
  4. Inventory
  5. Prepaid Expenses
  6. Other Liquid Assets

Liquidity Ratios

  1. Current Ratio
  2. Quick Ratio
  3. Cash Ratio
Liquidity Ratios

Liquidity Ratios

YouTube video of Liquidity Ratios

Current Ratio

The current ratio compares current assets to current liabilities.

Current Ratio Formula

Current Assets / Current Liabilites

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Current Ratio - Current Assets/Current Liabilities

Current Ratio - Current Assets / Current Liabilities

169,694 / 95,082 = 1.78

Quick Ratio

The quick ratio compares highly liquid current assets to current liabilities.

Quick Ratio Formula

Cash + Cash Equivalents + Marketable Securities + Net Accounts Receivable / Current Liabilites

Notice that inventory and prepaid expenses are not included in the quick ratio. 

Quick Ratio

Quick Ratio

(13,931+90,826+44,261) / 95,082 = 1.57

Cash Ratio

The cash ratio compares highly liquid current assets, cash and cash equivalents to current liabilities.

Cash Ratio Formula

Cash + Cash Equivalents / Current Liabilites

Notice that accounts receivable, inventory, and prepaid expenses are not included in the cash ratio. 

Cash Ratio - Liquidity Ratio

Cash Ratio

(13,931+90,826) / 95,082 = 1.10

Liquidity Ratios Observations

A few observations:

  1. Notice the ratios goes down from 1.78, the current ratio, to 1.10 for the quick ratio. The numbers go down as current assets are eliminated.
  2. All three ratios are based on current liabilities.
  3. There are other liquidity ratios. Only three are covered in this article.
Ratios goes down as assets are eliminated from the formula

Ratios goes down as assets are eliminated from the formula

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Chris Menard

Chris Menard is a Microsoft Trainer (MCT) and works as a full-time Trainer at BakerHostetler - one of the largest law firms in the US. Chris runs a YouTube channel with 900+ technology videos that cover various tools such as Excel, Word, Zoom, Teams, Gmail, Copilot, Google Calendar, and Outlook. To date, the channel has helped over 20 million viewers. Menard also does 2 to 3 public speaking events yearly, presenting at the Administrative Professional Conference (APC), the EA Ignite Conference, the University of Georgia, and CPA conferences. You can connect with him on LinkedIn at https://chrismenardtraining.com/linkedin or watch his videos on YouTube at https://chrismenardtraining.com/youtube.

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