Importance of Liquidity Ratio

Importance of Liquidity ratios:

Liquidity Ratio is a metric that one uses to examine the financial status of a business to pay off its debts. It is the estimation of the measure of a business’s capability to pay off its current liabilities.

This is because liquidity is all about the daily income and expenses of a business. The liquidity ratio is highly essential for a business as it determines the liquidity position of a firm. They do this by converting their assets into cash.

It helps understand the availability of cash in a company which determines the short-term financial position of the company. A higher number is indicative of a sound financial position, while lower numbers show signs of financial distress.
It also shows how efficiently the company can convert inventories into cash. It determines the way a company operates in the market.
It helps in organizing the company’s working capital requirements by studying the levels of cash or liquid assets available at a certain time.

When assessing the health of a company, understanding the company’s liquidity is important for gauging how able a firm is to pay its short-term debts and current liabilities. Any cash left over can be used to pay dividends to shareholders and grow the firm.