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Liquidity Ratios
Can We Pay Our Bills?
Liquidity ratios tell you about a company’s ability to meet all its financial obligations—not just debt, but payroll, payments to vendors, taxes, and so on. These ratios are particularly important to small businesses—the ones that are often in danger of running out of cash—but they become important whenever a larger company encounters financial trouble as well. Not to harp on the airlines too much, but again they are a case in point. You can bet that in the years right after 2001, professional investors and bondholders were carefully watching the liquidity ratios of some of the larger airlines.
Again, we’ll limit ourselves to two of the most common ratios.
CURRENT RATIO
The current ratio measures a ...
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