Liquidity Ratios

What are the liquidity ratios:

Liquidity is a very critical part of a business. It is required for a business to meet its short-term obligations. Liquidity ratios are a measure of the ability of a company to pay off its short-term liabilities.

Liquidity ratios determine how quickly a company can convert the assets and use them for meeting the dues that arise. The higher the ratio, the easier is the ability to clear the debts and avoid defaulting on payments.

This is a very important criterion that creditors check before offering short-term loans to the business. An organization that is unable to clear dues results in creating an impact on the creditworthiness and also affects the credit rating of the company.

Liquidity is not only a measure of how much cash a business has. It is also a measure of how easy it will be for the company to raise enough cash or convert assets into cash. Assets like accounts receivable, trading securities, and inventory are relatively easy for many companies to convert into cash in the short term. Thus, all of these assets go into the liquidity calculation of a company.

Here are the most common liquidity ratios:

1. 1. Quick ratio
   2. Acid test ratio
   3. Current ratio
   4. Working capital ratio
   5. Times interest earned ratio