Liquidity and solvency ratios in Excel, and whether they improved

Liquidity ratios ask whether a business can pay what it owes in the coming year. Solvency ratios ask whether it can carry its debt over the long run. In a spreadsheet each one is a short division, and the real skill is reading the result: is it higher or lower than last year, and is that good or bad?

Two questions about risk

Profit is only part of the story. A profitable business can still run out of cash, and a business funded mostly by borrowing can struggle when interest bills arrive. Lenders and owners use two families of ratios to look at that risk.

• Liquidity is short term. Compare the assets that will become cash within a year with the liabilities due within a year.
• Solvency is long term. Compare how much of the business is financed by creditors with how much by owners, and whether earnings cover the interest.

Our financial ratios in Excel page introduces the current ratio, a simpler quick ratio, working capital, the debt ratio and times interest earned, alongside profitability ratios. This lesson goes further on the two risk families. It adds short-term investments to the quick ratio, introduces the cash ratio and the equity multiplier, and ends with a year-over-year comparison where you decide, with a formula, whether each ratio got better or worse.

The ratios this lesson uses

The three liquidity ratios get stricter as you go down. The current ratio counts every current asset. The quick ratio drops inventory and prepaid expenses, which take time to turn into cash or never do: a prepaid insurance policy is used up, not sold. The cash ratio drops receivables too, leaving only money the business has now or can raise at once.

"Debt" in these ratios means all liabilities, current and long-term. And interest coverage is the same idea as times interest earned: earnings before interest and income taxes divided by interest expense.

Worked example 1: liquidity at Juniper Landscaping

The free exercise gives you Juniper Landscaping's balance sheet at December 31, 2026, with a few income statement figures below it. The values sit in column B and you write the ratios in F4:F7.

The results are shown to two decimals here; the cells keep the full values, such as 2.64957… for the current ratio, and the Check compares those.

Juniper has $2.65 of current assets for each dollar due within the year. Strip out the $118,000 of inventory and $24,000 of prepaid expenses, and $168,000 of quick assets still covers current liabilities 1.44 times. Only on the strictest test, $83,000 of cash and investments against $117,000 of liabilities, does the ratio fall below 1, at 0.71. That pattern fits a business that sells on credit: it relies on receivables coming in to pay the bills. Working capital, $310,000 − $117,000, is a cushion of $193,000.

All three ratios divide by the same cell, B14. The parentheses matter: =B4+B5+B6/B14 would divide only the receivables and then add cash and investments.

Worked example 2: solvency at Pine Street Dental

The second exercise uses Pine Street Dental, laid out the same way. Total liabilities are $633,000 (B16), total equity $970,000 (B17) and total assets $1,603,000 (B11). Net income is $273,600, interest expense $36,432 and income tax expense $106,400.

Creditors have supplied about 65 cents for every dollar the owners have, and liabilities finance about 39% of the assets. The equity multiplier of 1.65 says the business holds $1.65 of assets for every dollar of equity. Notice it is exactly 1 more than debt-to-equity. That is no accident: assets equal liabilities plus equity, so assets ÷ equity = liabilities ÷ equity + 1. It makes a handy check on your work.

For coverage, rebuild earnings before interest and taxes from the three figures given: $273,600 + $36,432 + $106,400 = $416,432. Divided by $36,432 of interest, that is 11.43. Earnings could pay the year's interest more than eleven times over.

Worked example 3: did the ratios improve? (Bluebird Veterinary)

The third exercise gives Bluebird Veterinary's statements for two years: 2025 in column B and 2026 in column C. You calculate four ratios for each year in columns G and H, then show "Improved" or "Worsened" in column I.

Write the 2025 formulas in column G first, for example =B9/B14 in G4. Copy them one column right to H, and the relative references move with them: =C9/C14. No dollar signs are needed, because you want every reference to shift. (For when you don't, see absolute cell references in Excel.)

The interesting part is reading the mix. The current ratio fell sharply, yet the quick ratio rose slightly. The reason is inventory, which dropped from $282,000 to $81,000. Inventory counts in the current ratio but not in the quick ratio, so the most liquid assets actually held up. Debt-to-equity rose from 0.82 to 1.32 because equity fell from $985,000 to $545,000, which is a worse position even though total liabilities went down. Interest coverage tripled as earnings before interest and taxes grew from $93,136 to $248,721.

Row 6 is the one to watch. For debt-to-equity, a lower number is the improvement, so its formula uses less-than where the others use greater-than.

Common mistakes

These are the mistakes the three exercises recognize.

Leaving inventory in the quick ratio

Adding B7 to the quick assets gives Juniper 2.44 instead of 1.44, close to the current ratio and missing the point of the test. In the trend exercise it does more damage: Bluebird's quick ratio becomes 4.05 in 2025 and 2.27 in 2026, and the trend flips from Improved to Worsened. Count only cash, short-term investments and receivables.

Putting receivables in the cash ratio

=(B4+B5+B6)/B14 in F6 is the quick ratio again, 1.44 instead of 0.71. The cash ratio leaves receivables out, because customers haven't paid yet.

Using net income for interest coverage

=B20/B21 gives Pine Street Dental 7.51 instead of 11.43. Interest and income taxes were both deducted to reach net income, so both go back in before you compare with interest.

Counting only long-term debt

Using long-term debt (B15) in place of total liabilities gives a debt-to-equity of 0.57 and a debt ratio of 0.34, understating Pine Street's borrowing. Current liabilities are debts too; use B16.

Treating a higher debt-to-equity as better

If row 6 uses the same greater-than test as the others, Bluebird's rise from 0.82 to 1.32 shows Improved. More debt per dollar of equity means more risk, so flip the comparison.

MO-220 practice: analyzing financial statements

This lesson covers the "Analyze financial statements" objective in the "Prepare and analyze financial statements" area of the MO-220 exam outline, which asks for liquidity and solvency ratios as well as profitability ones. Accounting Exercises is not affiliated with Microsoft or Certiport. As MO-220 practice, it helps to know that MO-220 task instructions describe the purpose, such as "show whether the ratio improved", rather than naming a function. These exercises are worded the same way, so you choose the comparison and the IF yourself.

You work in a spreadsheet in your browser, using the same formulas you would write in Microsoft® Excel® workbooks, and each Check grades the values your formulas produce. The statements behind these ratios come from the balance sheet in Excel and the income statement in Excel. The free exercise below gives you new numbers each time.