Liquidity ratios: can the bills due this year be paid?
Liquidity is about the next twelve months, not the long run. The current, quick and cash ratios compare what a company can turn into money soon with what it must pay soon. Each is stricter than the one before. This lesson lets you change the mix of current assets, then reads Titan's and Info Edge's very different balance sheets.
- Level
- Beginner
- Reading time
- About 24 minutes
- Know this first
- Reading statements with ratios
By the end you will be able to:
- work out the current, quick and cash ratios from a balance sheet
- explain why each ratio is stricter than the last, and what it leaves out
- say why a high current ratio can come from stock that will not become cash soon
- read a ratio in the light of what sits in current liabilities
The question liquidity asks
A company can be profitable and still run out of money for the week's wages. Liquidity ratios look at that risk. They ask whether the things the business expects to turn into cash within a year are enough to pay the bills that fall due within the same year. The balance sheet splits both sides for exactly this purpose: current assets are cash and items expected to become cash within twelve months or within the normal operating cycle, and current liabilities are the amounts due in the same period.
Three ratios do the work, and each is stricter than the last because it counts fewer assets as ready to pay a bill.
Change the mix, watch the ratios
Below is a company with only three kinds of current asset: cash, receivables (money customers owe) and stock. Set each, and set its current liabilities. The left page lists the totals, and the right page shows the three ratios as a number of times. The sentence under the ledger reads them in plain words.
Current assets cover current liabilities 1.43 times. Without stock the cover falls to 0.71, so the comfort depends on selling the stock at close to its value. Cash alone covers 0.29 of the bills.
Three experiments. First, raise stock to ₹15,00,000 and leave everything else. The current ratio climbs to 2.86 and looks healthy, but the quick ratio has not moved from 0.71, because stock does not pay a supplier until it has been sold and the customer has paid. Second, put current liabilities up to ₹14,00,000. Now even the current ratio is below 1: the company owes more within the year than all its current assets are worth. Third, move cash to ₹7,00,000. The cash ratio is 1.00, so the company could settle every current bill today without selling a thing. The three ratios are the same company seen through three filters, and they can tell very different stories.
Reading the three ratios
Current ratio
All current assets over all current liabilities. It is the loosest test, because it counts stock and every other current item at the value on the balance sheet. A ratio below 1 means that if every current asset were turned into cash at its recorded value, the business still could not pay what is due this year. A ratio well above 1 is comforting only if the assets are really convertible.
Quick ratio
Also called the acid-test ratio. It drops stock, which is the asset that takes longest and is least certain to turn into cash at full value, and keeps cash, short-term investments and receivables. A business that sells for cash and turns stock fast, such as a food retailer, can be healthy with a low quick ratio. One that holds slow-moving stock needs a higher one.
Cash ratio
Cash, bank balances and short-term investments over current liabilities. It is the strictest test: could the company pay everything due this year from money it already holds. Few healthy companies hold that much, because idle cash earns little. It is most useful as a worst-case reading.
The order is always current, quick, cash, from largest to smallest, because each removes something from the top. If your quick ratio comes out larger than your current ratio, one of them is wrong.
Titan: a stock business
The first table shows what sits in current assets and current liabilities for both companies. The second turns those into the four ratios. Titan is in ₹ crore and Info Edge in ₹ million, as printed. Cash here means the balance sheet line plus other bank balances and current investments, which are the short-term holdings a company could turn into cash quickly.
| Balance sheet line | Titan FY2023-24, ₹ crore | Titan FY2022-23, ₹ crore | Info Edge FY2023-24, ₹ million | Info Edge FY2022-23, ₹ million |
|---|---|---|---|---|
| Current assets | 22,693 | 20,686 | 38,937.30 | 31,287.11 |
| of which inventories | 16,874 | 14,952 | none | none |
| of which receivables | 937 | 908 | 70.82 | 89.84 |
| of which cash, bank balances and current investments | 2,440 | 2,935 | 17,248.62 | 9,788.82 |
| Current liabilities | 13,362 | 11,521 | 14,250.51 | 12,790.69 |
At 31 March 2024, Titan had current assets of ₹22,693 crore against current liabilities of ₹13,362 crore, a current ratio of 1.70, down from 1.80 a year earlier. Of the current assets, ₹16,874 crore, or 74%, was inventory. Take it out and the broad quick ratio is 0.44, with ₹5,819 crore of other current assets against the same bills. Count only cash, bank balances, current investments and receivables and the strict version is 0.25. The cash ratio is 0.18.
None of that means Titan is in trouble. A jeweller's shelves are its main asset, and as the lesson on working capital and the cash cycle showed, its stock equals about 167 days of cost of goods. What the ratios do show is that Titan's ability to pay its current bills rests on selling jewellery at close to its recorded cost. The direction is worth noticing too. Current liabilities grew 16.0% in the year, while current assets grew 9.7%. Cash and current investments fell from ₹2,935 crore to ₹2,440 crore, and short-term borrowings rose from ₹1,190 crore to ₹2,670 crore.
Gold on loan
Of Titan's current liabilities, ₹4,938 crore, or 37%, is gold on loan. The same line appeared in the working capital lesson, where one rating agency was quoted as treating it as short-term debt, and Titan's own cash flow statement treats changes in it as working capital. The ratio depends on the reading. As printed, the current ratio is 1.70. If gold on loan were set aside as a different kind of funding, the current ratio would be 2.69. That is only arithmetic, not a measure Titan publishes. The printed figure is the careful one to use, because the loan is still an obligation that falls due.
Info Edge: no stock, and a different kind of liability
Info Edge's balance sheet has no inventory line, since it sells services. Its current ratio was 2.73 at 31 March 2024 and 2.45 a year before. Because there is no stock to remove, the broad quick ratio equals the current ratio, which is marked with an asterisk in the table. The strict version is 1.22, and the cash ratio is 1.21, up from 0.77. Cash, bank balances and current investments of ₹17,248.62 million were larger than all current liabilities of ₹14,250.51 million. By this test the company could pay every bill due this year from money it already holds. The gap between the broad ratio of 2.73 and the strict one of 1.22 is mostly ₹21,084.79 million of other current financial assets, a line this lesson does not break down, so the note to the accounts is the place to look before relying on either version.
Now look at what the liabilities are. "Other current liabilities" were ₹12,135.38 million, and the earnings presentation gives deferred revenue of ₹11,360 million. Deferred revenue is money customers have already paid for services Info Edge has yet to deliver. It is a promise to provide a service, and mostly does not need cash to settle. It makes up about 80% of current liabilities. Set it aside and current liabilities fall to ₹2,890.51 million, and the current ratio rises to 13.5 for FY2023-24, against 12.0 the year before. Those two figures are illustrations of how much the answer moves, not measures the company publishes.
Info Edge shows the opposite lesson from Titan. For a business paid in advance, a large current liability is not a worry in the way that bank debt would be. A high ratio there reflects customers' trust, and the real question becomes whether the company will be able to deliver and keep earning the revenue.
The ratios side by side
| Ratio | Titan FY2023-24 | Titan FY2022-23 | Info Edge FY2023-24 | Info Edge FY2022-23 |
|---|---|---|---|---|
| Current ratio: current assets ÷ current liabilities | 1.70 | 1.80 | 2.73 | 2.45 |
| Quick ratio, broad: (current assets − inventories) ÷ current liabilities | 0.44 | 0.50 | 2.73* | 2.45* |
| Quick ratio, strict: (cash, bank balances, current investments and receivables) ÷ current liabilities | 0.25 | 0.33 | 1.22 | 0.77 |
| Cash ratio: (cash, bank balances and current investments) ÷ current liabilities | 0.18 | 0.25 | 1.21 | 0.77 |
* Info Edge has no inventories, so the broad quick ratio is the same as the current ratio. The broad and strict quick ratios differ when there are other current assets that are neither cash nor receivables nor stock. For Titan these are loans, other financial assets and similar items.
What these ratios cannot tell you
- They are a photograph. The balance sheet is struck on one day. A company with a seasonal peak can look strong or weak depending on the date.
- Recorded value is not realisable value. Stock may sell below cost, and receivables may not all be collected. The current ratio takes the books at their word.
- They ignore timing. A bill due tomorrow and a bill due in eleven months both count. A company can pass the ratio and still be short on the day wages are due.
- They ignore credit lines. A company with unused bank limits can be more liquid than any ratio suggests.
- Classification matters. Titan's gold on loan and Info Edge's deferred revenue each move a ratio by a great deal. Always look at what is in the denominator.
- There is no universal pass mark. A figure of 2 is sometimes quoted as comfortable, yet Titan operates at 1.70 and the right level differs by industry and by how quickly the business turns its assets into cash.
Liquidity at three global companies
Liquidity ratios ask whether a company can pay what it owes in the next twelve months. The table computes the two simplest measures for Apple, Microsoft and Toyota from their latest balance sheets: the current ratio, which sets all current assets against current liabilities, and the cash ratio, which counts only cash and short-term investments.
| Latest balance sheet | Current ratio | Cash ratio (cash and short-term investments over current liabilities) | Working capital, millions |
|---|---|---|---|
| Apple | 0.89 | 0.33 | $(17,674) |
| Microsoft | 1.35 | 0.67 | $49,913 |
| Toyota | 1.26 | 0.31 | ¥7,644,456 |
On the usual rule of thumb, a current ratio below one is a warning. Apple's is 0.89, which would be a concern for a small company. Apple is not in trouble, and the reason shows why a ratio must always be read with the balance sheet behind it.
Why Apple's ratio is below one
Apple keeps a large part of its investments in marketable securities that mature after more than a year. The $77,723 million of these is in non-current assets, and so it does not count in the current ratio. If it were counted, the ratio would be 1.36. Apple's current liabilities of $165,631 million also include the amounts it owes suppliers, which it pays over about four months after receiving the goods, as the lesson on the cash cycle shows, and these are paid out of cash that comes in from customers continuously. Only $20,329 million of the current liabilities is borrowing.
Microsoft's ratio of 1.35 is the most comfortable of the three. Its cash ratio, 0.67, is also the highest, so it could cover two-thirds of everything it owes in the coming year from cash and short-term investments alone. Note that Microsoft's current liabilities include $64,555 million of unearned revenue, which is not a debt to be repaid in cash but a service to be delivered.
Toyota: borrowing in the current bucket
Toyota's current ratio is 1.26, but half of its current liabilities, ¥15,829,516 million of ¥29,434,220 million (53.8%), is borrowing due within a year. The reason is its finance arm, which funds loans to buyers partly with short-term borrowing and rolls it over. On the other side, ¥11,453,249 million of its current assets are financial services receivables, which fall due in the same period. A cash ratio of 0.31 looks thin on its own. For a manufacturer with a lending business, the more telling question is whether the maturing loans to customers and the maturing borrowing match, and the balance sheet cannot answer it by itself.
What can change the ratio between systems
The size of current liabilities depends partly on how leases are recorded. Under IFRS 16 every lease, other than short-term and low-value ones, creates a liability whose next-twelve-month part is current. US GAAP's ASC 842 also puts leases on the balance sheet but treats operating and finance leases differently in the income statement. Either way, the current portion of lease liabilities is part of current liabilities, which lowers the current ratio compared with accounts from before these standards. The lesson for comparisons across countries is to check which obligations sit inside the ratio and compare companies with similar structures.
Common mistakes
Treating a high current ratio as proof of strength
It can come from stock that is not selling. Titan's current ratio is 1.70, but 74% of its current assets is inventory.
Comparing across industries
Titan's 1.70 and Info Edge's 2.73 reflect different businesses, one holding gold and watches and the other collecting fees in advance. Neither number is better by itself.
Reading deferred revenue like a bank loan
It is a liability, and it is settled by providing a service. That is very different from a debt repaid in cash. Check what the larger items in current liabilities actually are.
Using only one ratio
The current ratio alone would call Titan fairly comfortable. The quick and cash ratios say that comfort rests on selling stock. Read all three.
Forgetting the trend
Titan's current ratio fell from 1.80 to 1.70, and its cash ratio from 0.25 to 0.18. One year does not make a trend, but the direction is a prompt to read the cash flow statement.
Try it yourself
1. A company has cash of ₹2 lakh, receivables of ₹3 lakh and stock of ₹5 lakh. Its current liabilities are ₹7 lakh. Work out the three ratios.
Show the working
Current assets are 2 + 3 + 5 = 10. Current ratio: 10 ÷ 7 = 1.43. Quick ratio: (2 + 3) ÷ 7 = 0.71. Cash ratio: 2 ÷ 7 = 0.29. These are the opening values of the calculator above.
2. A shop's current ratio is 2.5 and its quick ratio is 0.6. What does the gap tell you, and what would you check next?
Show the working
Most of its current assets are stock. The quick ratio says that without selling stock it covers only 60% of its bills. Check how fast the stock turns (inventory days), and whether it sells at or above its recorded cost.
3. Titan's current assets were ₹22,693 crore and its current liabilities ₹13,362 crore at 31 March 2024. Work out the current ratio, and say what share of current assets was inventory of ₹16,874 crore.
Show the working
22,693 ÷ 13,362 = 1.70. Inventory ÷ current assets = 16,874 ÷ 22,693 = 74%.
4. Info Edge's current ratio was 2.73, yet about 80% of its current liabilities is deferred revenue. Why does that matter when you judge the ratio?
Show the working
Deferred revenue is settled by delivering a service, not by paying cash, so the cash needed to meet the liabilities is much smaller than the total suggests. Setting it aside moves the ratio to about 13.5. The true position is somewhere between the printed ratio and that, and it depends on what delivering the services will cost.
Where this is used
- A bank sets a minimum current ratio as a condition of a loan and checks it every year or quarter.
- A supplier deciding how long to give credit to a new customer looks at the customer's quick ratio and cash ratio.
- A treasurer watches the cash ratio to decide how much to keep in bank accounts, and how much to move into longer-term investments.
- An analyst compares the quick ratio with the current ratio to see how much of a company's comfort depends on stock.
Key terms
- Liquidity
- How easily a company can meet its short-term obligations from assets that turn into cash soon.
- Current assets
- Cash and assets expected to become cash within twelve months or the normal operating cycle.
- Current liabilities
- Amounts due to be settled within twelve months or the normal operating cycle.
- Current ratio
- Current assets divided by current liabilities.
- Quick ratio
- Current assets that can be turned into cash fast, usually cash, investments and receivables, divided by current liabilities. Also called the acid-test ratio.
- Cash ratio
- Cash, bank balances and short-term investments divided by current liabilities.
- Deferred revenue
- Money received for services not yet delivered. It is a liability settled by providing the service.
Questions people ask
What is a good current ratio?
There is no single number. Textbooks often quote 2 as comfortable, but a business that sells quickly for cash can run safely below 1, and one with slow stock may need more than 2. Compare with similar firms and with the company's own history.
Why does the quick ratio leave out stock?
Because stock takes longest to turn into cash and may have to be sold below cost to raise money in a hurry. The quick ratio asks whether the bills can be paid without relying on that.
Is a very high current ratio bad?
It can be. It may mean cash is sitting idle, stock is piling up unsold or customers are paying late. It is a prompt to ask what makes it high.
Are the formulas the same on every website?
No. In particular the quick ratio has two common versions and they differ when a balance sheet has other current assets. Check the definition before comparing.
Sources and review
- Titan Company Limited, audited standalone and consolidated financial results for the year ended 31 March 2024, filed with BSE. Source of the balance sheet, including gold on loan.
- Info Edge (India) Limited, audited standalone financial statements, Q4 FY24. Source of the balance sheet.
- Info Edge (India) Limited, investor presentation, May 2024. Source of deferred revenue, printed in ₹ million.
- CRISIL Ratings, rating rationale for Titan Company Limited, September 2024, for the treatment of gold on loan as short-term debt in credit analysis.
- CPA British Columbia, Financial ratio analysis (guidance), for the definition of the current ratio as current assets divided by current liabilities.
- Institute of Chartered Accountants of India, Ind AS 1, Presentation of Financial Statements (lecture slides), for the split of assets and liabilities into current and non-current.
- Apple Inc., Form 8-K, Exhibit 99.1: fourth quarter and full-year fiscal 2025 results, filed with the US Securities and Exchange Commission. Source of Apple's statements.
- Microsoft Corporation, Form 8-K, Exhibit 99.1: fourth quarter and fiscal year 2025 results, filed with the US Securities and Exchange Commission. Source of Microsoft's statements.
- Toyota Motor Corporation, FY2025 Financial Summary (IFRS, unaudited, in millions of yen), furnished to the US Securities and Exchange Commission on Form 6-K. Source of Toyota's statements.
- Deloitte, Roadmap: IFRS and US GAAP comparison, 5.7 Leases, for lessee accounting under IFRS 16 and ASC 842.
How the numbers were checked: both balance sheets were rebuilt from the printed lines and matched the printed totals before any ratio was computed. Each ratio was recomputed from those lines, and the order current ≥ quick ≥ cash was asserted for both companies in both years. The deferred revenue figure was checked to be smaller than the "other current liabilities" it sits in. The calculator was tested against separate arithmetic across thousands of slider combinations.