Glossary
Liquidity Ratios: Current, Quick and Cash Ratio
In financial statements it is not only profit that should be watched but also the ability to pay. Liquidity ratios measure this ability at three levels of strictness.
Three core ratios
| Ratio | Formula | What it measures |
|---|---|---|
| Current ratio | Current assets / Short-term liabilities | How far short-term debts are covered by current assets |
| Quick (acid-test) ratio | (Current assets − Inventories) / Short-term liabilities | Ability to pay without relying on stock |
| Cash ratio | (Cash and equivalents + Marketable securities) / Short-term liabilities | Immediate ability to pay |
General reference values
References often cited in textbooks are:
- Current ratio: about 2
- Quick ratio: about 1
- Cash ratio: about 0.2
These numbers vary with the structure of the sector. What matters is your trend against your own past periods and the sector average.
Example
Suppose a business has current assets of TRY 10,000,000, inventories of TRY 4,000,000, cash and equivalents of TRY 500,000 and short-term debts of TRY 8,000,000.
- Current ratio: 10,000,000 / 8,000,000 = 1.25
- Quick ratio: (10,000,000 − 4,000,000) / 8,000,000 = 0.75
- Cash ratio: 500,000 / 8,000,000 = 0.06
Although the current ratio looks acceptable, the quick and cash ratios point to a risk of payment pressure.
What ratios do not show
Ratios are based on the balance sheet at a single date. They do not show the maturity schedule of payments. Ratios should therefore be monitored together with the cash flow statement and a short-term cash forecast.
How Denova can help
In our Financial Advisory service we read the ratios against sector benchmarks and identify weak links and the steps to fix them.
Frequently asked questions
What is the ideal current ratio?
The traditional rule of thumb is around 2, meaning TRY 2 of current assets for every TRY 1 of short-term debt. The ideal ratio varies by sector, however. It can be lower in fast-cash sectors such as retail and higher where the production cycle is long.
If the current ratio is high, is everything fine?
No. If the current ratio is high but most current assets are uncollectable receivables or unsold stock, the ratio is misleading. The quick and cash ratios should be checked as well.
This article is for general information only and is not legal advice. Every case must be assessed on its own facts. It reflects Turkish law as of the publication date.