Liquidity Ratio

What is Liquidity Ratio?

Liquidity ratio (also known as “quick ratio” or “acid-test ratio”) is a metric demonstrating a debtor’s ability to pay current debts without acquiring capital. This KPI is used to gauge financial fidelity over the short term. A simple formula helps businesses calculate their liquidity ratio:

Liquidity ratio = (cash + accounts receivable + securities)/liabilities

When analysts know a business’s liquidity ratio, they can compare it to the same company’s past ratios. This metric can also be compared to the liquidity ratios of similarly-sized companies in the same industry.

Related terms

3 Way Match

3-way matching refers to a three-step process of matching three key documents before processing a payment to a supplier.

30-Day and 13-Week Operating Cash Burn

30-day and 13-week operating cash burn are also known as the “burn rate.” These are the rates at which a business consumes its cash reserves when it isn’t bringing in profit.

Accounts Payable Automation

Accounts payable automation (AP Automation) refers to the use of technology and software solutions to streamline and optimize the accounts payable process within an organization.

Accounts Payable Days

Accounts Payable Days (AP Days), also referred to as Days Payable Outstanding (DPO), is a financial ratio that measures the average time a company takes to pay its suppliers or vendors for credit purchases.

Accounts Payable Turnover

Accounts payable turnover explains how many times a business pays its creditors in a set timespan. Companies can use this metric to measure their short-term liquidity.

Accounts Receivable Turnover

The accounts receivable turnover ratio (or debtor turnover ratio) allows businesses to evaluate their debt collection efficiency.