What is a liquidity ratio?

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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