Current Ratio and Liquidity Ratio

Matt Preuss
Marketing Manager
Liquidity Ratio Current Ratio
Unlock your investor relationships. Try Visible for free for 14 days.
Start your free trial

As we’ve discussed before calculating your quick ratio is an easy formula to understand how efficiently your company can grow. The higher the quick ratio the more efficient a company can grow. An example quick ratio formula can be found below:

Quick Ratio Formula = (New MRR + Expansion MRR) / (Contraction MRR + Churned MRR)

In addition to the quick formula, we see many startups track two other financial ratios: current ratio and liquidity ratio. Tracking different financial ratios can be an integral part of a companies’ success as they offer a quick and easily digestible way to understand where your company stands. Where a quick ratio observes your short term financials, the current ratio and liquidity ratio observe all of your assets and long term obligations.

Liquidity Ratio

Liquidity ratio or liquidity ratios are often seen in a similar sense as a quick ratio and can be used as an umbrella term. Both quick ratios and current ratios are a different form of liquidity ratios. According to Investopedia, “Liquidity ratios are an important class of financial metrics used to determine a debtor’s ability to pay off current debt obligations without raising external capital. Liquidity ratios measure a company’s ability to pay debt obligations and its margin of safety through the calculation of metrics including the current ratio, quick ratio, and operating cash flow ratio.”

Related Resource: From IPOs to M&A: Navigating the Different Types of Liquidity Events

Liquidity ratios are important to startups and their investors because it helps determine if a startup can meet their current debt obligations.

Current Ratio

As mentioned above, a current ratio is a form of a liquidity ratio. A current ratio is a longer term look at a companies’ debts and assets. The current ratio formula is very simple and can be found below:

Current Ratio Formula = Current Assets / Current Liabilities

While different companies may interpret what counts as an asset differently, a current ratio of 1 is generally accepted as a good current ratio value. Whereas a quick ratio often observes just your recent revenue, a current ratio takes a holistic view at all of your assets and liabilities which causes a bit more variance from company to company.

All in all, tracking your liquidity ratios (current ratio and quick ratio) can offer both startup leaders and investors a high level view of the companies ability to grow and cover their debt obligations.

You may also enjoy:
Customer Stories
Building Trust and Vulnerability in Business with Max Yoder
On the fourth episode of the Thrive Through Connection Podcast, we welcome Max Yoder, the Founder of Lessonly and author of Do Better Work. Lessonly was an Indianapolis-based company that grew to over 300 employees and $30 million in annual recurring revenue before being acquired by Seismic in 2021. Max joins us to share the lessons he learned from scaling Lessonly and writing Do Better Work. About Max In addition to growing Lessonly to 300+ employees and leading it through a successful exit, Max became known for his thoughtful approach to leadership, insights he captured in his book, Do Better Work. He’s had a front-row seat to the highs, lows, and daily challenges that startup founders and leaders face. In this episode, Max breaks down the countless relationships that shaped both Lessonly and Do Better Work. Mike, the CEO and Founder of Visible, had an opportunity to sit down and chat with Max. You can give the full episode a listen below: Spotify Link Apple Link What You Can Expect to Learn from Max How the mission and vision for Lessonly came to life How mentors helped shape decision-making and strategy in the early days The advantages of having a strong network What it means to lead with vulnerability The importance of aligning with investors and partners Stay up to date with the Thrive Through Connection Podcast by subscribing wherever you listen to your podcast. You can find links to your favorite podcast hosts below: YouTube Spotify Apple
Fundraising
Finding the Right Investors with Laurel Hess
Reporting
Navigating Investor Relationships with Brett Brohl
Fundraising
Going From Operator to Funder with Leo Polovets