Value Investing means to analyse and interpret the financial position of a company. So one of the first questions an investor should ask himself is: “is this company able to pay it´s liabilities ?”. In order to answer this question we should have a look into the balance. To be exact we should have a look at the ratio between liquid assets and liabilities to be paid.

The current ratio provides us information about the financial strength of a company. In order to calculate the current ratio we have to divide the current assets by the current liabilities of a company.

In my opinion for most businesses a ratio between 1 and 2 is ideal but this varies from company to company and depends on the industry. However a current ratio under 1 indicates liquidity problems and a current ratio above 2 lack of efficiency. By the way, Benjamin Graham always wanted a ratio of at least 2 to one.

The second key figure we can calculate is the so-called quick ratio or acid test ratio. This key figure provides more information about the cash position of the company. But it´s more focused on if the company is able to pay coming liabilities.

In order to calculate the quick ratio we divide the financial assets by the current liabilities of a company. The quick ratio should always be below 1. If this is not the case the company could really face problems to pay it´s bills.

The last ratio is the so-called cash ratio. The cash ratio is the most strictest form to calculate the accounting liquidity of a company. We divide just the liquid assets so the financial assets minus outstanding bills by the current liabilities. The result of this calculation should always be above 0.2 .