What is Liquidity Ratios?
Nexa Consultancy | Startup & Finance Glossary
Liquidity Ratios are financial metrics that measure a company's ability to pay off its short-term debt obligations without raising external capital. The main liquidity ratios are the Current Ratio and the Quick Ratio (Acid-Test Ratio).
Base Term for Startups: For startups, which often operate with limited cash reserves, maintaining adequate liquidity is a matter of survival. These ratios help founders and investors assess the short-term financial health and risk of the company.
Base Term for SaaS: A SaaS company with significant deferred revenue (a current liability) might have a lower-looking Current Ratio, but because of its predictable recurring revenue, its actual liquidity position may be very strong.
Base Term Calculation: Current Ratio = Current Assets / Current Liabilities
Base Term Example: A company with ₹50 Lakhs in current assets and ₹25 Lakhs in current liabilities has a Current Ratio of 2.0, which is generally considered healthy.