Why is liquidity ratio important?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Why is liquidity ratio important?

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Liquidity is how easily cash is available on hand.

Liquidity ratio is defined as a ratio that is computed to know the ability of the debtor to meet its debt obligations without raising any external sources of funds. Some of the common liquidity ratios would include the following:

Current ratio, acid test ratio, operating cash flow ratio & cash ratio.

Formula: Current ratio = Current assets/Current liabilities

Quick ratio = Current assets - inventory/current liabilities.

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