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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 in most 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 several of the larger carriers have been through bankruptcy in recent years. You can bet that professional investors and bondholders have been carefully watching their liquidity ratios ever since.
Again, we’ll limit ourselves to two of the most common ratios.
CURRENT RATIO
The current ratio measures a company’s ...
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