How to read a liquidity ratio
There is no pass mark for a liquidity ratio. Learn what a low or a high figure can mean, what moves it and where it stops being useful.
Task 1No single right answer3 questions
There is no pass mark. A ratio is read against last year, and against similar businesses.
A current ratio below 1 means short-term debts are bigger than current assets. A business that is paid at once, such as a grocer, can live with that. A business that waits weeks to be paid needs more cover.
A very high ratio is not always good news. It can mean cash sitting idle, inventory that is not selling, or customers who are slow to pay.
| Item | Marlow Kitchens | Corner grocer |
|---|---|---|
| Customers pay | 30 days after the invoice | At the till |
| Current ratio | 1.5 | 0.8 |
| Quick ratio | 0.75 | 0.3 |
Task 2What moves the ratios4 questions
Task 3The limits of a ratio3 questions