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The liquidity ratio is a financial statistic that assesses a company's capacity to use its current assets to satisfy its short-term liabilities. It gauges how quickly a business can turn its present assets into cash to cover short-term expenses like paying suppliers or making payments.
By dividing a company's current assets by its current liabilities, the liquidity ratio is computed. Cash, marketable securities, accounts receivable, and inventory are examples of current assets. Accounts payable, short-term loans, and other debts with maturities within a year are examples of current liabilities.
If a corporation has a high liquidity ratio, it likely has a sizable quantity of current assets that can be utilized to pay its current obligations. This may indicate that the business is well-positioned to handle its short-term financial responsibilities without turning to outside borrowing.
A company may have trouble paying its short-term obligations if its liquidity ratio is low, and it may need to rely on extra funding to satisfy its immediate cash demands.
The liquidity ratio is an important indicator of a company's short-term debt repayment capacity, but it is unable to reveal a company's long-term financial stability or profitability. When assessing a company's total financial health and performance, it's crucial to take other financial ratios and measures into account.
