# Liquidity Ratio

## What is Liquidity Ratio

**Liquidity ratios** are a class of financial ratios that measure a company's ability to meet its short-term financial obligations. These ratios are used to assess a company's financial position and assess the risk of investing in the company. Some common liquidity ratios include the current ratio, the quick ratio, and the cash ratio.

The current ratio is a liquidity ratio that measures a company's ability to pay off its current liabilities with its current assets. It is calculated by dividing a company's current assets by its current liabilities. The higher the current ratio, the more liquid a company is and the better able it is to pay off its short-term obligations.

The quick ratio, also known as the acid-test ratio, is a liquidity ratio that is similar to the current ratio, but it includes only the most liquid assets (such as cash and cash equivalents and marketable securities) in the numerator. It is calculated by dividing a company's most liquid assets by its current liabilities. The higher the quick ratio, the more liquid a company is and the better able it is to pay off its short-term obligations.

The cash ratio is a liquidity ratio that measures a company's ability to pay off its current liabilities with its most liquid assets (such as cash and cash equivalents). It is calculated by dividing a company's cash and cash equivalents by its current liabilities. The higher the cash ratio, the more liquid a company is and the better able it is to pay off its short-term obligations.

It is important to note that liquidity ratios should be considered in conjunction with other financial ratios and metrics in order to get a complete picture of a company's financial performance. While high liquidity ratios may indicate that a company is financially healthy and able to meet its short-term obligations, they may also indicate that the company is not effectively using its assets to generate profits. Similarly