Liquidity ratios are a group of ratios created to measure the ability of a business operation to meets its current obligations. Liquidity ratios are similar to the initial medical tests a patient receives at a doctor’s visit. Doctors take blood pressure, temperature, and pulse rate. The doctor wants assurance that the primary indicators of health are good. Liquidity ratios are exactly the same. The user wants to know that the basic measurements of a business indicate good health today.
Liquidity ratios identify various time periods of liquidity. From the longer operating cash ratio down to the immediate cash ratio, there are four ratios in this group. Many novice businessmen mistakenly place too much emphasis on this set of ratios in their decision models. The simple truth is that liquidity ratios are easily manipulated and