What are liquidity ratios?

Liquidity refers to the ability of a borrower to pay his debts as and when they fall due. Good liquidity is a requirement of all companies especially banks and other financial institutions. Imagine going to your bank to withdraw cash and the cashier at the counter says, I don't have enough money in the branch come back later. It would be frustrating wouldn't it be? This would not happen if the bank had enough liquidity to meet its daily customer withdrawal needs.

Ok, now coming back to the topic, Liquidity RatiOS are the ratiOS that can be used to measure the liquidity of a company. As a rule of the thumb, all companies must have good liquidity ratiOS.

The four main ratiOS that fall under this category are:

1. Current Ratio or Working Capital Ratio

2. Acid-test Ratio or Quick Ratio

3. Cash Ratio

4. Operation Cash-flow ratio