Liquidity Ratios

Definition: Liquidity Ratios are calculated to determine the capacity of a firm to pay off its short-term obligations when they become due. In other words, firm’s cash balance or the readiness to convert its asset into cash, to pay off its current debt is called as liquidity and the ratios that compute it are called as liquidity ratios.

Following are the Important liquidity ratios:

• Current Ratio
• Acid-test Ratio
• Cash Ratio

Generally, the firm having a liquidity ratio greater than 1 is considered to be financially sound and is able to meet its short-term obligations with ease. Higher the liquidity ratio, higher will be the margin of safety. The liquidity ratios are concerned with the current assets and the current liabilities.