Liquidity

Liquidity refers to a company's ability to meet its short-term financial obligations as they fall due, using available or quickly realisable assets. It is measured by liquidity ratios: current ratio (current assets / current liabilities), quick ratio (current assets excluding inventory / current liabilities) and cash ratio (cash / current liabilities). In business valuation, the liquidity of the target's shares — or lack thereof (illiquidity discount) — is a key valuation adjustment for unlisted companies. In due diligence, a current ratio below 1.0x signals cash stress risk that may require post-acquisition working capital injection.

‍

Example: due diligence on a Swiss industrial SME reveals a current ratio of 0.85 (current assets CHF 4.3 million / current liabilities CHF 5.1 million). This sub-1.0x ratio signals potential cash stress, leading the analyst to model a detailed 12-month cash flow forecast — identifying a CHF 800,000 peak cash deficit in month 4 post-closing that the buyer must fund as part of the acquisition financing plan.

‍

Hectelion analyses structural and cyclical liquidity as both a risk indicator and a value driver in every valuation and due diligence engagement.