Company's Financial Accounting
Liquidity coefficients
Indicators: Quick ratio and Current ratio
Indicator: Quick ratio (in Finnish, maksuvalmius)
The Quick ratio estimates the company's ability to pay for its current liabilities. This indicator shows what part of the short-term payment obligations the company can repay immediately or in the short-term period. The calculations are based on the balance sheet data. Let's consider the Balance Sheet of the hypothetical company X.
The Quick ratio calculates as following:
In our example we have:
Quick ratio describes how liquid assets cover short-term debts. The higher the quick ratio, the better the financial situation of the company, but this value may vary among industries. The indicative values according to the Yritystutkimusneuvottelukunta (YTN) for Quick ratio’s result interpretation are:
| more than 1 | Good |
| 0,5 - 1 | Satisfactory |
| less than 0,5 | Weak |
Liquid assets do not cover short-term liabilities if the company has the quick ratio that is less than 0,5. The low value of the ratio gives a negative sign for investors; it means that the company has a high risk of insolvency.
In our calculations we have got the Quick ratio equal to 1,6 that is a good result. The Quick ratio formula excludes the stocks (inventory) element from calculations and the result equal to 1,6 means that the company can repay its current debts using only liquid assets and without selling its stocks (inventory).
Indicator: Current ratio (in Finnish, maksuvalmius)
The Current ratio measures the company's solvency, its ability to repay the current liabilities (within one fiscal year).
The difference between the Current and Quick ratio is that Current ratio includes the stocks (inventory) element, which is often difficult to turn into cash very quickly. Thus, if your company cannot convert the stocks into cash in a short time period (over the year) in order to pay current obligations, it is better to use Quick ratio to calculate the solvency of the company.
The Current ratio calculates as following:
In our example we have:
The indicative values according to the Yritystutkimusneuvottelukunta (YTN) for Current ratio result interpretation are:
| more than 2 | Good |
| 1 - 2 | Satisfactory |
| less than 1 | Weak |
The higher the current ratio, the higher the liquidity of the company's assets. Acceptable Current ratios' results vary along industry between 1 and 2; optimal value of a coefficient is 2 and more for the healthy business.
In our calculations we have got the Current ratio equal to 3,7 that is a good result and it means that the company can repay all its current obligations in short time period.