They want to determine the risk level involved in giving short term credit to the business. Quick Ratio; The quick ratio is also called acid test ratio. Each of them deserves close attention: 1. Liquidity is a very critical part of a business. Liquidity Ratios consist of Current Ratio (Also known as Working Capital Ratio), Quick Ratio (Also known as Acid Test), Operating Cash Flow Ratios, and solvency ratio. Current ratio is the type of liquidity ratio that measures the company’s ability to pay its short term liability by comparing the current assets, which the company can convert to cash within one year, to its current liabilities which … Liquidity ratios are financial ratios that measure a company’s ability to repay both short- and long-term obligations. The current ratio tells a company’s ability to pay off the debt obligations. Liquidity is required for a business to meet its short term obligations. Liquidity ratios are a measure of the ability of a company to pay off its short-term liabilities. Types of Liquidity Ratios. Liquidity ratios are very useful for analyzing liquidity position of the company. Liquidity Ratios: Liquidity ratios are the group of financial ratios that measure entity financial ability to pay its short term debit. These ratios can be divided into two broad categories: (A) Liquidity Ratios (B) Stability Ratios. 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. There’s more than one type of liquidity ratio that determines the financial health of a banking institution. These ratios are used externally as well as internally for analysis. (A) Liquidity Ratios: They are very useful to short-term creditors or lenders. Here are the types of liquidity ratios. 2 Types of Liquidity Ratio Current Ratio. Analysts compare the liquidity ratios of one firm to another firm or the industry for comparative analysis. So, let’s understand what are the types of liquidity ratios … It is a liquidity ratio that measures the capability of a business for payment of its current liabilities with only current assets when they come due. Liquidity Ratios. Understanding the Two Types of Liquidity Ratios. In this article, we will consider some commonly used liquidity ratios used in the financial analysis of a company. Therefore, the above analysis suggests that liquidity analysis is an important tool to measure the short-term solvency of a company. Common liquidity ratios include the following: The current ratio Current Ratio Formula The Current Ratio formula is = Current Assets / Current Liabilities. USES OF LIQUIDITY RATIOS. 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