Scatter plot matrix for interpreting credit

Current ratio (3rd degree liquidity) - definition & calculation


Every analyst must be aware that liquidity levels are static metrics. You are therefore susceptible to accounting policy measures. For example, if no bills are paid for the whole of December, liabilities will increase. If instead bills are paid that are not yet due, they decrease. This has an enormous influence on the current ratio. Therefore, this aspect must be kept in mind.

Furthermore, the 3rd degree liquidity shows no age structure and no maturities. Assuming that the receivables are far from due, but the liabilities are about to fall due, the liquidity value does not reflect reality.

Balance sheet-dependent key figure

External evaluators usually do not have enough insight to assess the quality of the assets. Hidden reserves or hidden burdens are therefore not sufficiently taken into account in the degree of liquidity. In practice, inventory can be worth much more than it is on balance due to high demand, or much less if quality has deteriorated over time.

Finally, investors should also look to periodic events. Loan repayment dates, payment runs and quarterly closings can affect liquidity in both directions. It is therefore important to keep an eye on the current news situation.