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Definition

Liquidity Ratios

Liquidity ratios measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash. Short-term creditors such as bankers and suppliers are particularly interested in assessing liquidity. 

Liquidity ratios are used as indicators of a firm’s ability to meet its short-term obligations.These  obligations  include any current liabilities, including currently maturing long term debt. Current assets move through a normal cash cycle of inventories-sales-accounts receivable cash. The firm then uses cash to pay off or reduce its current liabilities. The best known liquidity ratio is the current ratio; current assets divided by current liabilities.

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