Liquidity ratios and solvency ratios are tools investors use to make investment decisions. Liquidity ratios measure a company's ability to convert its assets to cash. On the other hand, solvency ratios measure a company's ability to meet its financial obligations.
Solvency ratios include financial obligations in both the long and short term, whereas liquidity ratios focus more on a company's shortterm debt obligations and current assets.
Liquidity Ratios
Liquidity ratios gauge a company's ability to pay off its shortterm debt obligations and convert its assets to cash. It is important that a company has the ability to convert its shortterm assets into cash so it can meet its shortterm debt obligations. A healthy liquidity ratio is also essential when the company wants to purchase additional assets.
One common liquidity ratio is the current ratio. The current ratio measures a company's ability to meet its shortterm debt obligations. It is calculated by dividing its current assets by its current liabilities. Generally, a higher current ratio indicates that the company is capable of paying off all of its shortterm debt obligations.
Solvency Ratios
In contrast to liquidity ratios, solvency ratios measure a company's ability to meet its total financial obligations. The solvency ratio is calculated by dividing a company's net income and depreciation by its shortterm and longterm liabilities. This indicates whether a company's net income is able to cover its total liabilities. Generally, a company with a higher solvency ratio is considered to be a more favorable investment.

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What are the main differences between the current ratio and the quick ratio?
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Current Ratio
The current ratio is a liquidity ratio that measures a company's ... 
Ratio Analysis
A ratio analysis is a quantitative analysis of information contained ... 
Cash Asset Ratio
The cash asset ratio is the current value of marketable securities ... 
Quick Ratio
The quick ratio measures a companyâ€™s ability to meet its shortterm ... 
Asset Coverage Ratio
A test that determines a company's ability to cover debt obligations ... 
Liquidity
Liquidity is the degree to which an asset or security can be ...