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Key Takeaways:
BONUS: IN 2024, SEVERAL PAYMENT BANKS IN INDIA FORMALLY REQUESTED A 10% REDUCTION IN THE STATUTORY LIQUIDITY RATIO (SLR) AND APPROVAL TO START LENDING, AIMING TO IMPROVE THEIR LIQUIDITY FLEXIBILITY AND EXPAND REVENUE SOURCES.
A liquidity ratio shows how easily a company can pay its short-term bills using the money and assets it already has. It is a simple way to check if the company has enough cash to stay safe and run smoothly.
Ravi Sharma owns a small fintech company. He wants to know if his business can pay its debts of ₹5,00,000 in the next 12 months. His company’s current assets are worth ₹8,00,000.
Step 1: Write the formula: Liquidity Ratio = Current Assets ÷ Current Liabilities.
Step 2: Put the numbers: ₹8,00,000 ÷ ₹5,00,000 = 1.6.
Step 3: Read the result: A ratio of 1.6 means Ravi has ₹1.60 for every ₹1 of debt, showing good short-term safety.
In this blog, we will explore liquidity ratio types, formulas, importance, examples, and key fintech stability metrics.
Liquidity ratios are important because they show how easily a fintech company can pay its short-term bills. These ratios help businesses manage funds, plan cash flow, and avoid sudden money shortages. Investors and lenders use them to decide if a company is safe to invest in or lend to.
Regulators also check liquidity levels to ensure stability in the financial system. Below is a table showing the main reasons liquidity ratios matter in the fintech industry:
These reasons prove that liquidity ratios are not just numbers; they are tools for trust, growth, and survival in fintech.
Liquidity ratios can be measured in different ways, depending on how strict you want the check to be. Below are three main types, each with a fintech-based example.
Example: Ananya Verma runs a digital lending firm. She has current assets worth ₹9,00,000 and current liabilities worth ₹4,50,000.
Formula: Current Assets ÷ Current Liabilities = 9,00,000 ÷ 4,50,000 = 2.0
This means she has ₹2 in assets for every ₹1 she owes, showing strong short-term stability.
Example: Rahul operates a crypto exchange with current assets of ₹15,00,000, inventory of ₹5,00,000, and liabilities of ₹7,50,000.
Formula: (Current Assets − Inventory) ÷ Current Liabilities = (15,00,000 − 5,00,000) ÷ 7,50,000 = 1.33
This shows he can pay short-term debts quickly without selling stock.
Example: Priya runs a payment processing company with cash and cash equivalents of ₹4,00,000 and liabilities of ₹8,00,000.
Formula: Cash + Cash Equivalents ÷ Current Liabilities = 4,00,000 ÷ 8,00,000 = 0.5
This means she can instantly pay half her debts in cash.
Below is a comparison table showing how each ratio works and where it is best used.
These ratios together give a balanced view of a company’s ability to meet short-term needs.
Liquidity ratios are calculated by dividing assets by liabilities, but the type of assets included depends on the ratio. In fintech, accurate calculation helps companies stay prepared for market shifts. Let’s take a start-up example.
Step 1: List all current assets – ₹12,00,000
Step 2: List inventory – ₹2,00,000
Step 3: List current liabilities – ₹6,00,000
Step 4: Apply formulas:
Financial stability in fintech is measured using more than just liquidity ratios. Key metrics show if a company can handle debt, pay interest, and keep operations running smoothly.
Here’s a table showing each metric with its formula, ideal range, and fintech example.
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Tracking these metrics helps fintech companies remain financially secure even during funding slowdowns or market dips.
After its IPO in 2021, Paytm faced strong investor scrutiny over its cash reserves and burn rate. Although the company had raised over ₹18,000 crore, reports showed that significant marketing and expansion costs began to pressure its cash flows.
To manage liquidity better, Paytm reduced discretionary expenses, focused on its lending vertical, and improved operating cash flow from its merchant services. This improved its Operating Cash Flow Ratio over time and helped regain partial investor confidence.
Knowing the formula is not enough. You must also understand what the numbers say about your company.
A fintech firm’s liquidity ratio should be compared with industry averages before making any big financial decision.
Liquidity ratios are helpful, but they are not perfect. They should be seen as part of a bigger financial check.
This is why fintech companies must combine liquidity ratios with other performance metrics for a complete view.
Liquidity ratios are widely used to check short-term financial health, but they cannot show the full picture. In fintech, where cash flows change quickly, these ratios must be read with caution. Some risks may not be reflected clearly in the numbers.
1. Profitability is not measured: Even when a liquidity ratio is high, the company may still be losing money.
For example, during the early launch phase of a neobank, ₹10 crore may be raised through funding, giving a high current ratio. But if the company is burning ₹1 crore per month and has no steady income, it may still fail despite good liquidity.
2. Seasonal trends can distort results: Ratios may look strong or weak because of seasonal changes.
During India's festive season or tax filing months, payment gateway companies often see a rise in receivables and cash inflows, making the current ratio look healthy. However, this strength may disappear in the off-season, misleading investors or lenders.
3. Asset values may change suddenly: If receivables are delayed or defaulted, the asset value used in the ratio becomes inflated.
For example, a BNPL fintech may show ₹20 crore in current assets from customer repayments. But if 30% of those users default, the real liquidity is much lower than the reported ratio suggests.
4. External shocks are not reflected: Events like demonetisation in 2016 in India or sudden UPI downtime can impact digital wallet companies.
For example, fintech firms like digital wallets may have shown a cash ratio of 0.8 before demonetisation. But overnight cash demand surged, and user withdrawal requests tripled, exposing gaps not captured by the previous ratios.
While liquidity ratios help assess financial safety, they cannot be trusted alone. In fintech, where rapid growth, market disruptions, and digital risks are common, these ratios must be read with other indicators like cash burn, profitability, user churn, and operational metrics. This ensures better decision-making and early risk detection.
Before sharing the steps, remember: improving liquidity is not just about holding more cash. It is about managing resources better.
A steady improvement in liquidity ratios builds investor trust and prepares fintech firms for funding rounds.
Liquidity ratios help check if a company can pay its short-term bills. For fintech firms, where things move fast, tracking these numbers often is very important. We looked at ratios like current, quick, cash, and others like Operating Cash Flow and DSCR. These help companies decide when to cut costs, collect payments faster, or raise money. In today’s tight funding market, staying financially strong is a must, not a choice.
1. Can liquidity ratios be influenced by temporary borrowing before reporting periods?
Yes, liquidity ratios can be artificially improved if short-term funds are borrowed just before financial reporting, although this does not reflect the company’s true financial strength.
2. Are liquidity ratios still useful in fintech models that follow subscriptions, such as SaaS or neobanks?
Yes, liquidity ratios can still be used, but they must be supported with metrics such as Monthly Recurring Revenue (MRR) to provide a more complete financial picture.
3. Can unresolved UPI settlements or delayed refunds affect liquidity ratios?
Yes, these delays can lead to a temporary increase in receivables, which may make the liquidity position appear stronger than it actually is.
4. Should separate liquidity ratios be calculated for core operations and third-party partner services in fintech?
Yes, separate liquidity ratios should be calculated, as this allows more accurate monitoring of which business areas require financial attention.
5. Can an improved liquidity ratio increase the valuation of a fintech company?
Yes, a strong liquidity position is often viewed positively by investors and may lead to a higher company valuation during funding or acquisition rounds.
Q6. Is the cash ratio more important than the current ratio?
No. Cash ratio is the strictest test, but the current ratio gives a more balanced view.
Q7. What tools can fintech companies use to track liquidity?
Accounting software with real-time reporting, such as Zoho Books or Tally, can help track ratios quickly.
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