Introduction 🚀

Liquidity ratios are a group of financial metrics used to measure a company's ability to meet its short-term obligations.

They are used to assess a company's liquidity, or its ability to meet its financial obligations as they come due.

Importance 🔑

1. Liquidity ratios are important because they provide insight into a company's ability to meet its short-term financial obligations.

2. They are used by investors, creditors, and analysts to determine the short-term financial health of a company.

Common Interview Questions 🤔

1. What are liquidity ratios and why are they important?

2. Can you provide an example of a liquidity ratio and explain how it is used?

3. How do liquidity ratios differ from profitability ratios?

4. How do changes in a company's liquidity ratios affect its ability to meet its financial obligations?

Advantages 💡

1. Liquidity ratios can provide insight into a company's short-term financial health.

2. They can help investors and creditors determine a company's ability to meet its financial obligations.

3. Liquidity ratios can be used to compare a company's liquidity with that of its peers or industry averages.

Disadvantages 🚫

1. Liquidity ratios only provide a snapshot of a company's short-term financial health and do not provide insight into its long-term financial stability.

2. They can be affected by accounting practices and may not always provide an accurate picture of a company's liquidity.

Conclusion 💭

1. Liquidity ratios are a valuable tool for assessing a company's short-term financial health and ability to meet its financial obligations.

2. They are used by investors, creditors, and analysts to determine a company's liquidity.

3. While liquidity ratios have some limitations, they can provide useful information when used in conjunction with other financial metrics.

It is important to note that the most common liquidity ratios are:

1. Current ratio: current assets / current liabilities

2. Quick ratio or Acid-test ratio: (current assets - inventories) / current liabilities

3. Cash ratio: cash and cash equivalents / current liabilities

Liquidity Ratios