What is "Liquidity Ratio" meaning?

Liquidity ratio is a financial metric used to evaluate a company's ability to cover its short-term liabilities with its short-term assets. It helps investors and managers understand whether the business has enough resources to handle immediate financial obligations without needing to secure additional financing.

Example

“Before extending credit, the lender checked the company’s liquidity ratio to ensure it could repay the loan.”

How is "Liquidity Ratio" used in business?

In business, liquidity ratios—like the current ratio and quick ratio—are used to assess risk and operational efficiency. These ratios are especially important for small businesses and startups managing limited cash reserves. Strong liquidity ratios increase confidence among creditors and investors.

Pro Tip

Aim for a current ratio above 1.0 as a general benchmark, but also consider industry standards, as ideal levels can vary.

Related Terms

Current Ratio, Quick Ratio, Assets, Financial Health