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What is a liquidity ratio?

Author:
Harold Averkamp, CPA, MBA

Definition of Liquidity Ratio

A liquidity ratio is a financial ratio that indicates whether a company’s current assets will be sufficient to meet the company’s obligations when they become due.

Examples of Liquidity Ratios

Typically, the following financial ratios are considered to be liquidity ratios:

The amount of a company’s working capital is also cited as an indicator of liquidity.

However, a company with a large amount of inventory that is difficult to sell may have a large amount of working capital and a favorable current ratio, but may not have liquidity. Hence, the inventory turnover ratio and the accounts receivable turnover ratio can provide insights as to a company’s ability to convert its current assets to cash in time to pay its obligations when they become due.

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

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