Liquidity and solvency ratios: current, quick and debt-equity
1 min read
Updated 29 Sep 2026
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AI summary
Can the business pay its short-term bills and carry its debt?
3 sections
Liquidity
| Ratio | Formula | Rough guide |
|---|---|---|
| Current ratio | Current assets ÷ Current liabilities | 1.2–2 is comfortable for most trading firms |
| Quick (acid-test) ratio | (Current assets − Inventory − Prepaid) ÷ Current liabilities | Around 1 or more |
| Cash ratio | (Cash + Bank + liquid investments) ÷ Current liabilities | Higher = safer |
Solvency
| Ratio | Formula | Rough guide |
|---|---|---|
| Debt-equity | Total borrowings ÷ Shareholders' funds | Below 2 for most MSMEs; banks prefer lower |
| Interest coverage | EBIT ÷ Interest | Above 2–3 |
| DSCR | (Net profit + Depreciation + Interest) ÷ (Principal repayment + Interest) | Banks usually want 1.25 or more |
Example
Current assets ₹30 lakh (stock ₹12 lakh), current liabilities ₹20 lakh → current ratio 1.5, quick ratio 0.9. The business depends on selling stock to pay its bills.
"Rough guides" differ by industry. Compare with your own past years and with similar businesses.
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