What Does Liquidity Ratios Mean?
A class of financial metrics used to help determine a company’s ability to pay off its short-term debt obligations. Generally, the higher the value of the ratio is, the larger the margin of safety that the company possesses to cover short-term debts. Investopedia explains 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 calculate only the sum of cash and equivalents divided by current liabilities because they feel that they are the most liquid assets and therefore are 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 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.
