Liquidity Ratios

Liquidity ratios measure a company's capacity to fulfill immediate financial obligations, thereby indicating solvency levels. Two primary ratios are evaluated:

Current Ratio: This metric assesses whether a corporation can pay off short-term debts. It is calculated by comparing current liabilities against current assets. "Any company is established to have a healthy current ratio if the ratio is 2:1" (Brigham and Houston 2009, pg 87).

The liquidity ratio determines the ability of a company to meet their immediate liability and serves as an important indicator of financial health, enabling stakeholders to assess short-term risk and operational efficiency.