1. What is Liquidity Ratio?

The Liquidity Ratio measures a company's ability to pay off its short-term obligations with its most liquid assets. It indicates the financial health and short-term solvency of a business.

2. How Does the Calculator Work?

The calculator uses the Liquidity Ratio formula:

Where:

• Liquid Assets — Cash, marketable securities, and other assets that can be quickly converted to cash
• Short-Term Liabilities — Debts and obligations due within one year

Explanation: The ratio shows how many times a company can cover its current liabilities with its liquid assets.

3. Importance of Liquidity Ratio

Details: A higher liquidity ratio indicates better short-term financial health. Creditors and investors use this ratio to assess a company's ability to meet its short-term obligations.

4. Using the Calculator

Tips: Enter the total value of liquid assets and short-term liabilities in the same currency units. Both values must be positive, with short-term liabilities greater than zero.

5. Frequently Asked Questions (FAQ)

Q1: What is considered a good liquidity ratio?
A: Generally, a ratio above 1.0 is considered good, indicating the company has more liquid assets than short-term liabilities.

Q2: What's the difference between liquidity ratio and current ratio?
A: While similar, liquidity ratio focuses only on the most liquid assets, whereas current ratio includes all current assets.

Q3: Can a liquidity ratio be too high?
A: Yes, an excessively high ratio may indicate inefficient use of assets that could be invested elsewhere for better returns.

Q4: How often should liquidity ratio be calculated?
A: It's typically calculated quarterly or annually as part of regular financial reporting.

Q5: What types of assets are considered liquid?
A: Cash, bank deposits, marketable securities, accounts receivable, and other assets that can be quickly converted to cash.