What are Net Liquid Assets?
Net liquid assets are cash and securities that can be converted to cash quickly, minus current liabilities.
How Do Net Liquid Assets Work?
The formula for net liquid assets is:
Net Liquid Assets = Cash + Marketable Securities - Current Liabilities
note that current liabilities are liabilities due within the next 365 days.
For example, let's assume that Company XYZ has $1 million in cash on its balance sheet, $300,000 in marketable securities, and $2 million of current liabilities. Using the formula above, Company XYZ's net liquid assets are:
$1,000,000 + $300,000 - $2,000,000 = -$700,000
In this example, Company XYZ has negative liquid assets, meaning that if it was forced to pay off all of its current liabilities today, it would not be able to do so.
Why Do Net Liquid Assets Matter?
Clearly, having the cash in hand to pay off debts is an advantage to borrowers and soothing to lenders. Thus, analysts use net liquid assets as a very stringent test of how well a company can meet its short-term debt obligations.