Liquidity Ratios

The importance of adequate liquidity in the sense ,of the ability of a firm to meet current short-term obligations when they become due for payment can hardly be over stressed, In fact, liquidity is it prerequisite for the very survival of a firm. The short-term creditors of the firm are interested in the short-term solvency or liquidity of a firm. But liquidity implies, from the viewpoint of utilization of the funds of the firm, that funds are idle or they earn very little. A proper balance between the two contradictory requirements, that is, liquidity and profitability, is required fur efficient financial management. The liquidity ratios measure the ability of a firm to meet its short-term obligations and reflect the short-term financial strength/solvency of a firm. The ratios which indicate the liquidity of a firm are: (i) net working capital, (ii) current ratios, (iii) acid test quick ratios, (iv) super quirk ratios, (v) turnover ratios, (vi) defensive-Interval ratios and (vii) cash flow from operations ratio.

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