What does liquidity ratio measure?

The liquidity ratio is a financial metric that measures a company's ability to meet its short-term obligations, typically using its most liquid assets. This is crucial for assessing whether a business can efficiently handle its immediate liabilities, such as accounts payable and short-term loans, without jeopardizing its operational stability.

A company with a healthy liquidity ratio generally has enough liquid assets—like cash, marketable securities, and accounts receivable—to cover its short-term debts. This indicator is particularly significant for creditors and investors, as it provides insight into the firm's financial health and its ability to remain solvent in the near term.

In contrast, other metrics mentioned, such as long-term asset management capability, profitability, and market positioning, focus on different aspects of a company's performance and sustainability. While important, they do not specifically assess a company’s immediate financial obligations, which is the primary focus of liquidity ratios.