Liquidity ratios: What is it?

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Liquidity  ratios measure short term solvency- the ability of the firm to meet its debt requirements as they come due. Liquidity is the amount of cash a company can put its hands on quickly to settle its debts and possibly to meet other unforeseen demands for cash payments. Liquid funds consist of cash, trade receivables and short term investments for which there is a ready market.

The following liquidity ratios can be calculated: Current ratio= current assets/Current liabilities, Quick ratio= Current assets less inventory / Current liabilities, Cash ratio= cash plus marketable securities/current liabilities and cash flow from operations ratio= CFO/ current liabilities.