Liquidity ratios and net financial position of a supplier or a client

In short: the current ratio divides current assets by current liabilities; the quick ratio (or acid test) does the same, removing inventories; the net financial position (NFP) is total financial debts less cash and readily realisable financial assets. All of them are derived from the balance sheet. There is no right value for everyone: what counts is the comparison over time.

The three formulas

For the current ratio the definition is that of the Borsa Italiana glossary; for the quick ratio, that of the Altroconsumo glossary, which also calls it acid test. For the net financial position, a document by the National Foundation of Chartered Accountants (Fondazione Nazionale dei Commercialisti, Repaci, 2015) warns that neither Italian accounting standards nor IAS/IFRS fix its calculation method, and that the definition is far from unambiguous. The sign also changes depending on who calculates it: with the formula above, a positive number indicates a net debt. When you read an NFP calculated by someone else, always check which items it includes.

Where to find the items in the balance sheet (art. 2424 c.c.)

The balance sheet format is set by art. 2424 c.c. This is a simple and prudent construction of the items needed; accruals and deferrals are excluded.

So: current assets = C.I + short-term C.II + C.III + C.IV; for the quick ratio remove C.I. The NFP is D.1 + D.2 + D.3 + D.4 + D.5 less C.IV and C.III.

Watch out for abbreviated accounts. The abbreviated balance sheet shows only the items with capital letters and Roman numerals (art. 2435-bis c.c.). The current ratio and quick ratio are calculated the same way, because C.I, C.II, C.III, C.IV and the portion of debts beyond the year are all there. The NFP is not: the liabilities side shows only total debts, without separating banks, suppliers and the tax authorities. If the notes to the accounts give the breakdown of debts by nature, use it; otherwise ask for it. See the guide on abbreviated and micro-company accounts.

A step-by-step example

Example with invented figures: a supplier with full accounts.

• Current ratio = 600,000 / 500,000 = 1.20
• Quick ratio = (600,000 - 300,000) / 500,000 = 0.60
• NFP = (400,000 + 50,000 + 100,000) - 50,000 = 500,000 of net debt

Read together: at the balance sheet date, receivables and liquidity covered 60% of the debts falling due within the year. To pay the rest, the supplier must sell its inventory, collect new invoices or find other credit. A quick ratio below 1 means exactly this; it is not a verdict, but it tells you what the supplier depends on.

On a supplier you pay a deposit to

When you pay in advance, the risk is that the supplier does not deliver. At that point you are the creditor, and your money goes into its cash together with that of the others.

• Low quick ratio: the supplier relies on inventory and new collections to pay its short-term debts. Your deposit could be used to pay debts already overdue rather than your order.
• High advances received (liabilities item D.6, visible only in the full accounts): if they weigh heavily against liquidity, the supplier is financing itself with its customers' advances.
• NFP rising from one year to the next: more net debt to banks and lenders, to be paid alongside you. In the notes to the accounts, look for debts secured by collateral.

If the signals do not convince you, you can reduce the deposit, link it to the progress of the delivery or ask for a guarantee. See also the guide on how to tell from the accounts whether a supplier is about to fail.

On a client you extend credit to

When you grant payment terms, your invoice becomes a debt owed to the client's suppliers, that is, a current liability. A current ratio falling year after year means that short-term debts are growing faster than the assets that cover them: your invoice joins a queue that is getting longer. A high NFP says the client also has banks and lenders to pay; to see whether the cash it generates is enough to service that debt, use the DSCR and the operating margin explained in the guide on EBITDA and MOL. For debts to shareholders, the notes to the full accounts say whether they are subordinated, that is, repayable after the other creditors. To move from the ratios to a credit amount, there is the guide on how to calculate a trade credit line.

No magic thresholds: the limits of the ratios

• No universal ideal value. The Altroconsumo glossary says so explicitly for the quick ratio and adds that very high values can indicate resources that are not well invested. The Borsa Italiana glossary gives no thresholds for the current ratio. The most useful comparison is with the previous years of the same company.
• It is a snapshot at the balance sheet date. Liquidity at the financial year end can be very different from today's.
• Construction choices matter. Accruals and deferrals, shareholder debts, securities: whether or not they are included gives different numbers. Always use the same formula when you compare two years or two companies.

The full picture, from net equity to cash flows, is in the practical guide to reading a client's or supplier's accounts.

Sources

• Borsa Italiana, Financial glossary: Current Ratio (accessed 2026-11-01)
• Altroconsumo, Glossary: Quick ratio (accessed 2026-11-01)
• National Foundation of Chartered Accountants, A. Repaci, The net financial position as an alternative performance indicator (2015-09-15) (accessed 2026-11-01)
• Art. 2424 c.c., Contents of the balance sheet (Brocardi.it) (accessed 2026-11-01)
• Art. 2435-bis c.c., Abbreviated-form accounts (Brocardi.it) (accessed 2026-11-01)
• Art. 2427 c.c., Contents of the notes to the accounts (Brocardi.it) (accessed 2026-11-01)