What is a liquidity ratio?

Liquidity is the ability to convert assets into cash quickly and cheaply. Liquidity ratios are most useful when they are used in comparative form. This analysis may be internal or external. For example, internal analysis regarding liquidity ratios involves using multiple accounting periods that are reported using the same accounting methods.

How effective is liquidity ratio analysis?

Liquidity ratio analysis is less effective for comparing businesses of different sizes in different geographical locations. With liquidity ratios, current liabilities are most often compared to liquid assets to evaluate the ability to cover short-term debts and obligations in case of an emergency.

How do you measure a company's liquidity?

Below are three common ratios used to measure a company's liquidity or how well a company can liquidate its assets to meet its current obligations. The current ratio (also known as working capital ratio) measures the liquidity of a company and is calculated by dividing its current assets by its current liabilities.