Liquidity Ratios


DEFINITION of 'Liquidity Ratios'

A class of financial metrics that is used to determine a company's ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts.


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BREAKING DOWN 'Liquidity Ratios'

Common liquidity ratios include the current ratio, the quick ratio and the operating cash flow ratio. Different analysts consider different assets to be relevant in calculating liquidity. Some analysts will calculate only the sum of cash and equivalents divided by current liabilities because they feel that they are the most liquid assets, and would be the most likely to be used to cover short-term debts in an emergency.

A company's ability to turn short-term assets into cash to cover debts is of the utmost importance when creditors are seeking payment. Bankruptcy analysts and mortgage originators frequently use the liquidity ratios to determine whether a company will be able to continue as a going concern.

Testing a company's liquidity is a necessary step in analyzing a company. Read Liquidity Measurement Ratios to further improve your understanding of these ratios.

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  5. Liquidity Coverage Ratio - LCR

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  6. Cash Ratio

    The ratio of a company's total cash and cash equivalents to its ...
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  3. What are the differences between solvency ratios and liquidity ratios?

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  4. What are some of the limitations and drawbacks of using the cash conversion cycle ...

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  5. Are solvency ratios more concerned with the short-term or the long-term?

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