Description: The liquidity ratio is a financial measure that evaluates a company’s ability to meet its short-term obligations using its short-term assets. This indicator is crucial for investors and creditors as it provides a clear view of a company’s financial health. A high liquidity ratio suggests that the company has sufficient liquid resources to cover its immediate debts, which can be a sign of stability and strength. Conversely, a low ratio may indicate financial troubles, potentially leading to difficulties in meeting obligations and ultimately insolvency. The most common liquidity ratios include the current ratio, calculated by dividing current assets by current liabilities, and the quick ratio, which excludes inventories from current assets. These ratios are essential for financial management as they help businesses make informed decisions regarding investments, financing, and daily operations.
