What is a good liquidity ratio?
In short, a “good” liquidity ratio is anything higher than 1. Having said that, a liquidity ratio of 1 is unlikely to prove that your business is worthy of investment. Generally speaking, creditors and investors will look for an accounting liquidity ratio of around 2 or 3.
This ratio measures the financial strength of the company. Generally, 2:1 is treated as the ideal ratio, but it depends on industry to industry.
Low current ratio: A ratio lower than 1.0 can result in a business having trouble paying short-term obligations. As such, it may make the business look like a bigger risk for lenders and investors.
Creditors and investors like to see higher liquidity ratios, such as 2 or 3. The higher the ratio is, the more likely a company is able to pay its short-term bills. A ratio of less than 1 means the company faces a negative working capital and can be experiencing a liquidity crisis.
For instance, a quick ratio of 1.5 indicates that a company has $1.50 of liquid assets available to cover each $1 of its current liabilities. While such numbers-based ratios offer insight into the viability and certain aspects of a business, they may not provide a complete picture of the overall health of the business.
Liquidity ratio for a business is its ability to pay off its debt obligations. A good liquidity ratio is anything greater than 1. It indicates that the company is in good financial health and is less likely to face financial hardships.
For example, if a company has a current ratio of 1.5—meaning its current assets exceed its current liabilities by 50%—it is in a relatively good position to pay off short-term debt obligations. Conversely, if the company's ratio is 0.8 or less, it may not have enough liquidity to pay off its short-term obligations.
The most common Liquidity Ratio is the acid-test ratio. This measures a company's ability to pay off its short-term debts with liquid assets, such as cash equivalents or working capital.
The current ratio for Company ABC is 2.5, which means that it has 2.5 times its liabilities in assets and can currently meet its financial obligations Any current ratio over 2 is considered 'good' by most accounts.
A quick ratio of 0.5 would mean that a company only has £0.50 in assets for every £1 it owes in short-term liabilities, meaning it would not have enough to meet its short-term liabilities.
What is Apple's current ratio?
Apple's current ratio for the quarter that ended in Dec. 2023 was 1.07. Apple has a current ratio of 1.07. It generally indicates good short-term financial strength.
A higher overall liquidity ratio indicates the company has more liquid current assets to cover its short-term liabilities and expenses. An overall liquidity ratio of 1.5 or higher is considered financially healthy. For example, if a company has: Total current assets of $2,000,000.
A liquidity ratio is important because it states how much cash a bank to meet the request of its depositors. Therefore, a bank with a liquidity ratio of less than 30% is not a good sign and may be in bad financial health. Above 30% is a good sign.
2.1 Implications for Creditors and Investors
Liquidity ratios are essential for creditors and investors to make sound decisions regarding extending credit or investing in a company. Creditors, such as banks or suppliers, use liquidity ratios to evaluate a company's creditworthiness and ability to repay debts on time.
Comparing the company ratio with trend analysis and with industry averages will help provide more insight. A 1.1 ratio means the company has enough cash to cover current liabilities.
This ratio focuses primarily on the organization's ability to service debt payments in the near future. A ratio of 1.2 specifically indicates that the organization has $1.20 in liquid assets for every $1.00 of debt requirements.
| Liquidity Ratios | Formula |
|---|---|
| Current Ratio | Current Assets / Current Liabilities |
| Quick Ratio | (Cash + Marketable securities + Accounts receivable) / Current liabilities |
| Cash Ratio | Cash and equivalent / Current liabilities |
| Net Working Capital Ratio | Current Assets – Current Liabilities |
But it's also important to remember that if your liquidity ratio is too high, it may indicate that you're keeping too much cash on hand and aren't allocating your capital effectively. Instead, you could use that cash to fund growth initiatives or investments, which will be more profitable in the long run.
Generally, quick ratios between 1.2 and 2 are considered healthy. If it's less than one, the company can't pay its obligations with liquid assets. If it's more than two, the company isn't investing enough in revenue-generating activities. Keep in mind, however, that the quick ratio isn't the full picture.
A quick ratio above one is excellent because it shows an even match between your assets and liabilities. Anything less than one shows that your firm may struggle to meet its financial obligations. If the quick ratio is too high, the firm isn't using its assets efficiently.
What is Coca Cola's liquidity ratio?
Coca-Cola Co has a current ratio of 1.13. It generally indicates good short-term financial strength. During the past 13 years, Coca-Cola Co's highest Current Ratio was 1.34. The lowest was 0.76.
Wal Mart Stores's current ratio for fiscal years ending January 2020 to 2024 averaged 0.9x. Wal Mart Stores's operated at median current ratio of 0.8x from fiscal years ending January 2020 to 2024. Looking back at the last 5 years, Wal Mart Stores's current ratio peaked in January 2021 at 1.0x.
Tesla's operated at median current ratio of 1.5x from fiscal years ending December 2019 to 2023. Looking back at the last 5 years, Tesla's current ratio peaked in December 2020 at 1.9x. Tesla's current ratio hit its 5-year low in December 2019 of 1.1x.
Samsung Electronics's current ratio for fiscal years ending December 2019 to 2023 averaged 2.7x. Samsung Electronics's operated at median current ratio of 2.6x from fiscal years ending December 2019 to 2023.
Generally, a good Liquidity Ratio should be above 1.0. This indicates the company has enough current assets to cover its short-term liabilities. A higher Liquidity Ratio (above 2.0) shows the company is in a stronger financial position and may have spare cash available for investments or other opportunities.
