Liquidity ratios

In this lesson

1. 0:00 Liquidity ratios and working capital
2. 0:14 Current ratio explained
3. 0:33 Quick ratio and acid test
4. 1:42 Worked example: calculating both ratios

About this lesson

In this lesson, we break down the formulas, explain why the quick ratio excludes inventory, and work through a practical example so you can apply these ratios confidently in your exams and real-world analysis. The current ratio (current assets divided by current liabilities) shows how many times a company can pay off its short-term debts using its short-term assets. A ratio below 1.0 typically signals liquidity problems, but context matters—you'll need to benchmark against industry standards to make a fair judgment. The quick ratio (current assets minus inventory, divided by current liabilities) is more conservative: it strips out inventory because it's harder to convert quickly into cash, giving you a more realistic picture of immediate payment capacity. We walk through a complete worked example using financial statements, calculating both ratios step by step and interpreting what the results tell you about a company's financial health. By the end, you'll understand not just how to compute these ratios, but when and why to use each one—critical skills for exam success and professional practice.

Duration: 3m