The following liquidity ratios are all designed to measure a company’s ability to cover its short-term obligations. Companies will generally pay their interest payments and other short-term debts with current assets. Therefore, it is essential that a firm have an adequate surplus of current assets in order to meet their current liabilities. If a company has only illiquid assets, it may not be able to make payments on their debts. To measure a firm’s ability to meet such short-term obligations, various ratios have been developed.
a)Current Ratio
b)Acid Test (or Quick Ratio)
c)Working Capital
d)Leverage
These tools will be invaluable in making wise investment decisions.
