Question

What is Liquidity Ratio?

Hint:

Liquidity ratio indicates how well a business can cover its short-term liabilities with available current assets.

Answer 1

Step 1: Definition.
Liquidity ratio is a financial indicator that measures a company's ability to meet its short-term obligations using its current assets.
Step 2: Explanation.
It reflects how easily a company can convert its assets into cash to pay short-term debts. A higher liquidity ratio indicates stronger financial stability, while a lower ratio signals potential cash flow problems.
Step 3: Examples.
Common types of liquidity ratios are:
- Current Ratio: Current Assets / Current Liabilities
- Quick Ratio: (Current Assets – Inventory) / Current Liabilities
Step 4: Conclusion.
Liquidity ratio helps assess the firm’s short-term solvency and financial health.