This is a very similar ratio to the current ratio. The difference is that stocks or inventories are deducted from the current assets figure. This provides a clearer measure of whether a business has the cash or near cash assets to pay debts and borrowings falling due in the short term. It is often referred to as a measure of a business’s liquidity (cash being called a liquid asset).

A ratio of around 1.25:1 is usually considered acceptable. A lower ratio can be a sign of cash flow problems which can quickly lead to serious problems. Banks and potential investors are very interested in this ratio and will want to track it over time to make sure that a single healthy ratio was not a lucky coincidence.

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