## Why Investors Must Follow Rapid Liquidity and Other Financial Indicators

When you want to invest in a company, do you need to assess its survival capability under financial pressure? The liquidity ratio is precisely the tool used to answer this question. These financial indicators can intuitively reflect a company's short-term debt repayment ability, helping investors make more informed decisions.

## Which of the three liquidity indicators is the most important?

### The strictest standard: absolute Liquidity coefficient

The absolute liquidity ratio is the most conservative measure, as it only considers the cash on hand of the enterprise. The calculation formula is:

**Absolute Liquidity Ratio = Cash and Cash Equivalents / Current Liabilities**

This indicator is extremely harsh as it completely ignores accounts receivable and other liquid assets. If you see a company's absolute liquidity ratio is very high, it indicates that its cash reserves are quite ample.

### Balanced Choice: Fast Liquidity Coefficient

The quick liquidity ratio (also known as the acid-test ratio) takes balance into account, and the formula is:

**Quick Liquidity Ratio = ( Cash + Securities + Accounts Receivable ) / Current Liabilities**

Unlike absolute Liquidity, this metric includes the company's most easily liquidated assets but excludes inventory, as inventory often takes time to convert into cash. The quick Liquidity ratio is widely regarded as a more practical way to assess a company's short-term financial health.

### Most commonly used reference: Liquidity ratio

The liquidity ratio measures a company's ability to repay its current liabilities with its current assets:

**Liquidity Ratio = Current Assets / Current Liabilities**

This is the most commonly viewed indicator by investors, as it takes into account all assets that can be liquidated within a year, including inventory.

## How to correctly interpret these numbers

When the liquidity ratio equals 1, it means that the company's assets can just cover its short-term debts—this is a critical point. If the ratio is below 1, the company faces risks and may struggle to meet its near-term financial obligations.

Ideally, the liquidity ratio should be greater than 1, indicating that the company can not only meet its obligations but also has sufficient financial buffers. However, a value that is too high is not entirely a positive signal, as it may suggest that the company is not effectively utilizing its capital.

## Key Reminder: Don't Just Look at One Indicator

Although the liquidity ratio is useful, it cannot be used in isolation. To accurately assess the overall financial condition of a business, these metrics need to be analyzed in conjunction with industry benchmarks, historical data, and other financial ratios. Relying solely on liquidity indicators may lead to incomplete financial judgments.

When making investment decisions, one should examine the target company from multiple dimensions; quick liquidity and other liquidity indicators are only a part of this overall picture.