A business has to pay its suppliers, meet current expenses like staff salaries and marketing incidentals, and other immediate obligations on a continuing basis. Any failure to meet these can damage its reputation and creditworthiness and in extreme cases even lead to bankruptcy. Liquidity ratios are the business ratios that can reveal the likelihood and causes of any such problems.
What Do Liquidity Ratios Measure?
Liquidity ratios work with cash and near-cash assets (together called "current" assets) of a business on one side, and the immediate payment obligations (current liabilities) on the other side. The near-cash assets mainly include receivables from customers and inventories of finished goods and raw materials. The payment obligations include dues to suppliers, operating and financial expenses that must be paid shortly and maturing installments under long-term debt.
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