Liquidity Ratios

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Definition, Explanation and Use:

Liquidity ratios determine the ability of a business to finance, its day to day operations, or in other words, to pay its debts as they become due out of its current or liquid resources.

Trade payables and short term lenders are more interested in these ratios. They want to determine the risk level involved in giving short term credit to the business. On the other hand, the business is interested to determine its ability to settle its short-term obligations.

Types of Liquidity Ratios:

There are following types of liquidity ratios: