Definition of Liquidity Ratio

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Liquidity Ratio is an important ratio of finance as it pictures a company’s ability to pay its short-term debts and liabilities with its available current and/or liquid assets. Liquidity ratio of a company is a clear indicator of how well it is equipped to clear its short-term liabilities. The efficiency and timeliness of utilizing its current assets to pay the short-term debt.

 

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Liquidity ratio has three types.

Quick Ratio Formula:

Current Ratio Formula:

Cash Ratio Formula:

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In all of the three liquidity ratios, we would divide the assets on its liabilities. In this case, if the outcome is 1 that means the company has the ability to pay off its debts. If the outcome is less than 1 that means that the company is not able to pay off its debts.