What does the liquidity ratio measure?

The liquidity ratio is a financial metric that specifically assesses a business's ability to meet its short-term obligations. This ratio is crucial for understanding the company's financial health in the near term, particularly how well it can cover its current liabilities with its current assets. A higher liquidity ratio indicates that the business has a good buffer to handle short-term debts, ensuring it can maintain operations without facing financial distress.

This measurement is essential for stakeholders such as investors, creditors, and management as it provides insights into the company’s working capital management and operational efficiency. While liquidity focuses on short-term financial health, other metrics like solvency or profitability address different aspects of a company's overall performance and stability.