A financial ratio that is intended to provide information about a firm’s solvency or liquidity over the short run, i.e., its ability to meet short-term requirements for payment of obligations without undue stress. Mainly, short-term liquidity ratios focus on current assets and current liabilities. These ratios concern short-term creditors, in their attempt to ensure a borrowing firm is able to meet its short-term obligations (loans, bills, etc.). The most common ratios include:
- Current ratio = current assets/ current liabilities
- Quick ratio = (current assets – inventory)/ current liabilities
- Cash ratio = cash/ current liabilities
Short-term liquidity ratios are also known as short-term solvency ratios.
