The terms ‘liquidity’ and ‘short-term solvency’ are interlinked. It means the ability of the business to pay its short-term Obligations. Failure to pay-off short-term obligation affects its credibility as well as its credit rating. Continuous default on the part of the business leads to business bankruptcy. Ultimately such business bankruptcy may lead to its sickness and dissolution. Short-term lenders and creditors of a business are very much concerned to know its state of liquidity because of their financial stake. Usually, two ratios are used to put emphasis on the business ‘liquidity’. These are current ratio and quick ratio. Other ratios include cash ratio, interval measure ratio, and net-working capital ratio. Firm's Liquidity Current Ratio The Current Ratio reflects the financial strength. A simple measure that estimates whether the business can pay debts due within one year from assets that it expects to turn into cash within that year. A ratio ...