Liquidity Ratio

The liquidity ratio is a financial metric used to measure the ability of a business to pay off short-term debts without accessing additional capital from outside sources.

Some examples of liquidity ratios are:

• Quick Ratio

• Current Ratio

• Cash Ratio

• Operating Cash Flow Ratio

• Acid Test Ratio

Ideally, a business should maintain a liquidity ratio of greater than 1. If a company has a high liquidity ratio, not only does it have a greater ability to satisfy its current debt obligations, but it also has a more robust margin of financial security.

Creditors are much more likely to approve a company with healthy liquidity ratios for credit. Similarly, investors are more apt to invest in a company with strong liquidity ratios.

A company can improve their liquidity ratio in several ways. First, they can work to control their overhead expenses by negotiating with vendors or shopping around for better rates. They could also sell unnecessary assets, open a low-interest line of credit, or switch short- and long-term debt.