Liquidity Ratio Analysis

A controlled inventory build

For synthetic Example Company, opening cash is 1,200, receivables 1,000, inventory 800, PP&E 4,000, trade payables 1,000, long-term debt 2,000 and equity 4,000. Both sides of the opening balance sheet total 7,000. All amounts are EUR thousands; all other balances are zero.

Both annual forecasts have revenue of 10,000, COGS of 6,000 and overhead of 4,000. Operating profit is zero. Depreciation, capex, interest, taxes and distributions are zero. Receivables stay at 1,000, payables at 1,000 and debt at 2,000. Closing inventory is 800 in 2026 and 1,600 in 2027. Only the inventory increase changes cash.

Current ratio vs quick ratio: same total, different liquidity

In 2026, current assets are 1,200 cash + 1,000 receivables + 800 inventory = 3,000. In 2027, the 800 stock build absorbs 800 cash, so cash falls to 400. Current assets still total 400 + 1,000 + 1,600 = 3,000.

BalanceCheat divides current assets by trade payables + other current liabilities + the modeled revolver. Here that denominator is 1,000 + 0 + 0 = 1,000, so the current ratio stays at 3.00x. The quick ratio uses cash + receivables over the same denominator: it falls from 2,200 / 1,000 = 2.20x to 1,400 / 1,000 = 1.40x.

Other current assets are included in the current ratio but excluded from the quick ratio. The separately modeled long-term debt line is excluded from this current-liability denominator; there is no separate current-maturity reclassification in this exercise. Use the implemented line definitions rather than silently treating all debt as current.

What the divergence tells you

The current ratio is unchanged, but immediately available cash is lower and more assets must pass through inventory sale and collection before becoming cash. The quick ratio highlights this shift. It does not prove that receivables will collect on time or that stock is obsolete.

The arithmetic is a liquidity-quality warning, not a universal judgment that 3.00x is safe or 1.40x is unsafe. Seasonality, payment dates, restricted cash and inventory salability need information beyond these annual balances. The Cash Conversion Cycle adds an operating timing perspective.

Reproduce and trace the cash movement

Create a blank annual EUR model in thousands, starting in 2026, with zero actual years and two forecast years. Use Advanced mode and enter the opening balances and annual inputs above. Set gross margin to 40%, tax and interest to zero, and all other movements to zero. Set receivables, inventory and payables to the stated closing amounts in the Balance Sheet.

Compare current ratio and quick ratio in Metrics, then check inventory, cash and the inventory cash movement in the Cash Flow statement: operating cash flow is zero in 2026 and −800 in 2027. The preview and link open the financial model; neither loads these inputs. For the balance mechanics, use Working Capital and the Working Capital Model.

Choose the next analytical question

The Balance Sheet Model helps construct the financial position. Cash Flow Analysis explains how profitable operations can still consume cash. Return to Financial Ratio Analysis to combine liquidity with profitability, leverage and capital returns.