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.
