Liquidity and solvency are important parts of a company’s financial health. They measure the company’s ability to pay its bills when due. The liquidity ratios measure the ability of a company to meet its short-term obligations, say in the next 12 months. There are three liquidity ratios that can be calculated based on the information in the balance sheet or the statement of financial position of a non-financial institution: the current ratio, the quick ratio (which is also known as the acid-test ratio), and the cash ratio.
Key learning objectives:
What are the benefits of liquidity ratios?
How are the different liquidity ratios calculated?