Liquidity risk refers to the threat that a firm cannot meet its short-term financial obligations due to an inability to convert assets into cash quickly without incurring heavy losses.

 

Quantitative Liquidity Ratios

 

Current Ratio:

 

Current Ratio = Current Assets / Current Liabilities

 

Measures general short-term debt-paying ability. A sudden decline indicates cash strain.

 

 

Quick Ratio (Acid-Test):

 

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

 

Removes inventory, which may be illiquid or obsolete during a crisis.

 

 

 

Cash Ratio:

 

Cash Ratio = (Cash + Marketable Securities) / Current Liabilities

 

The most conservative metric; measures immediate defensive survival capability.

 

Dynamic Indicators

• Funding Liquidity Risk: The risk that a company cannot access capital markets or credit lines to roll over maturing short-term liabilities.

 

• Market Liquidity Risk: The inability to easily liquidate large asset blocks at prevailing market values due to a lack of buyers.

 

• The Structural Cash Mismatch: Growing cash burn rates paired with lengthening customer collection cycles that drain immediate safety buffers.

 

 

Working Capital Metrics

 

Cash Conversion Cycle (CCC): Tracks the days it takes to turn inputs into cash.

 

CCC = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) – Days Payable Outstanding (DPO)

 

• An expanding CCC means cash is trapped in operations, draining short-term liquidity.

 

• Net Defensive Interval: Measures how many days a company can operate using only its current liquid assets without receiving additional cash inflows.