Key metrics to assess financial strength: Liquidity ratios

The ability of a company to meet its short-term financial commitments is essential to understanding its economic health. Liquidity ratios are tools that measure the liquidity ratio and allow investors and financial institutions to quantitatively assess whether an organization can meet its immediate debts. Through these indicators, it is possible to identify potential cash flow problems and anticipate financial difficulties before they become crises.

Three main indicators: how liquidity ratios work

To obtain a comprehensive view of a company's payment capacity, there are three fundamental metrics. It is important to emphasize that none of these ratios alone provides a definitive diagnosis, but they must be interpreted in conjunction with other financial and historical factors of the organization.

The cash ratio: the most conservative measure

The cash ratio is the most restrictive indicator among the three, as it only considers the money available in cash. It is calculated as follows:

Cash Ratio = Available Cash ÷ Current Liabilities

This metric answers the fundamental question: how much cash on hand does the company have in relation to its short-term obligations? Due to its conservative nature, it usually yields lower values than other ratios.

The quick ratio or acid test: a balanced approach

This indicator provides a mid-term perspective, incorporating not only cash but also easily convertible assets. The formula is:

Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) ÷ Current Liabilities

By excluding inventories —considered less liquid— this ratio that measures the liquidity ratio provides a more realistic assessment of the company's immediate operational capacity.

The current ratio: broad view of liquidity

The most permissive of the three, the current ratio incorporates all available current assets:

Current ratio = Current assets ÷ Current liabilities

A higher value in this liquidity ratio indicates a stronger position in terms of the ability to meet short-term liabilities.

Practical interpretation of the results

When the liquidity ratio generates a value equal to one, it indicates that the organization has assets exactly equivalent to its current liabilities. If the number is less than one, there is a negative gap: the assets do not cover the obligations. The ideal situation occurs when the number exceeds one, demonstrating that the company has safety margins to meet its commitments.

However, it is essential to complement these calculations with industry comparative analyses, historical trends, and other financial indicators to make sound judgments about the true strength of the organization.