What do liquidity ratios help assess in a company?

Liquidity ratios are financial metrics used to evaluate a company's ability to meet its short-term obligations and current liabilities. These ratios, such as the current ratio and quick ratio, provide insight into how well a business can cover its debts as they come due, using its most liquid assets. For example, if a company has a current ratio greater than 1, it indicates that it has more current assets than current liabilities, which suggests a good liquidity position.

The assessment of liquidity is crucial for stakeholders, including creditors and investors, as it reflects the financial health and operational efficiency of the business in managing its short-term financial commitments. A strong liquidity position suggests that the company is less likely to experience financial distress in the near term, while low liquidity could signal potential problems in meeting upcoming financial obligations.