What do the three liquidity ratios tell you?
Liquidity ratios measure whether a company can pay its short-term liabilities with the resources it has. The cash ratio (1st degree) looks only at liquid funds, the quick ratio (2nd degree) adds short-term receivables, and the current ratio (3rd degree) includes all current assets. The further you go, the more the result depends on how quickly receivables and inventory actually turn into cash.
Jump to: Formulas · Worked example · Benchmarks · Limits of the ratios · How to use them
The three formulas
- Cash ratio (1st degree) = liquid funds ÷ short-term liabilities × 100%
- Quick ratio (2nd degree) = (liquid funds + short-term receivables) ÷ short-term liabilities × 100%
- Current ratio (3rd degree) = current assets ÷ short-term liabilities × 100%
Liquid funds include cash, bank balances and securities that can be sold quickly. Short-term liabilities are those due within one year, such as supplier invoices, taxes or loan instalments. Current assets additionally include inventory.
Worked example with fictitious numbers
Fictitious, simplified example (amounts in thousand euros): A software company has liquid funds of 40, short-term receivables of 80 and inventory of 60. Short-term liabilities are 100.
- Cash ratio = 40 ÷ 100 = 40%
- Quick ratio = (40 + 80) ÷ 100 = 120%
- Current ratio = (40 + 80 + 60) ÷ 100 = 180%
The numbers look solid. But receivables carry most of the weight: if customers pay 30 days later than planned, only 40 in cash stands against liabilities of 100. That is exactly what the first ratio shows. This is why all three values should be read together.
Commonly cited benchmarks
In practice you will come across these rules of thumb:
- 1st degree: roughly 20% (10 to 30% depending on the source)
- 2nd degree: at least 100%
- 3rd degree: 120 to 200% depending on the source
The ranges already show that there is no legal or universal target value. Industry, business model and payment terms change what a good value looks like. A subscription company with annual prepayments has different cash flows than a trading company with high inventory. Use benchmarks as a prompt to ask questions, not as a verdict.
Limits of the ratios
- Reporting date: The values describe a balance sheet date. If the data comes from financial statements several months old, reality has long since moved on.
- Quality of receivables: Open items that are disputed or overdue still count. Check the age of your receivables.
- Inventory is not cash: The 3rd degree includes stock that may sell only slowly.
- No view of the future: The ratios say nothing about upcoming payment dates. For that you need a 13-week cash flow forecast.
- Profit is not cash: Why strong earnings can still reduce liquidity is explained in the article EBITDA up, cash down.
How to use liquidity ratios in reporting
- Calculate all three ratios from the same reconciled balance sheet figures and state the reporting date.
- Show the trend over several months instead of a single value.
- Add the age of receivables and the next large payments.
- Define internally at which value you follow up, and put it in writing.
- Check whether your loan agreement contains covenants that define ratios differently.
How to spot bottlenecks early is covered in Liquidity squeeze: early warning signs. For support with planning and reporting, see FP&A and financial modelling.
Frequently asked questions
How do you calculate the quick ratio?
You add liquid funds and short-term receivables, divide the sum by short-term liabilities and multiply by 100. In this article's example, with fictitious numbers, that gives 120%.
What counts as a good value?
Commonly cited are about 20% for the 1st degree, at least 100% for the 2nd degree and 120 to 200% for the 3rd degree, depending on the source. There is no universal target value; industry and business model play a big role.
What is the difference between cash ratio, quick ratio and current ratio?
The cash ratio (1st degree) counts only liquid funds, the quick ratio (2nd degree) adds short-term receivables, and the current ratio (3rd degree) includes all current assets including inventory.
Are liquidity ratios enough to manage cash?
No. They describe a single date and say nothing about upcoming payment dates. For steering you additionally need a cash forecast.
Sources
Formulas and benchmarks based on Agicap: Liquiditätskennzahlen (German). The worked example was created by nugrow and contains no customer or benchmark data. As of October 2026.
