5.2 Liquidity ratios

Liquidity ratios indicate how quickly a company can convert its current and most liquid assets into cash for the purposes of timely payment of its short-term liabilities. Companies that fail to effectively manage their liquidity can run the risk of insolvency and, therefore, lenders and investors who are considering whether to lend money to the business entity will be specifically concerned about the liquidity of the company. The following ratios can be used to assess the liquidity of an entity.