Liquidity ratios

Definition

Liquidity ratios are financial metrics used to evaluate a company's ability to meet its short-term obligations using its current or quick assets. They measure how quickly assets can be converted into cash to pay off debts.

Related terms

Current Ratio: This ratio compares a company's current assets to its current liabilities, providing insight into its ability to cover short-term obligations.

Quick Ratio (Acid: Test Ratio) - This metric evaluates a company's ability to fulfill short-term liabilities with its most liquid assets, excluding inventory since it is not as readily convertible to cash.

Working Capital: Working capital is the difference between a business’s current assets and current liabilities, indicating the short-term financial health and operational efficiency of the company