What is assessed by liquidity ratios?

Liquidity ratios are financial metrics that assess a company’s ability to meet its short-term obligations and pay off current liabilities when they come due. The key aspect of liquidity ratios is their focus on the relationship between a company’s liquid assets and its current liabilities. This is crucial for stakeholders, such as creditors and investors, as it provides insight into the financial health of a company.

A strong liquidity position indicates that a firm can efficiently manage its cash flow and fulfill its immediate financial commitments, which is vital for maintaining operations and avoiding financial distress. Common liquidity ratios include the current ratio and the quick ratio, both of which highlight the company's capacity to convert assets into cash quickly and cover short-term liabilities without raising additional capital.

This focus sets liquidity ratios apart from other financial metrics, which might measure profitability, operational efficiency, or marketing effectiveness. Hence, the ability to pay short-term debts is the primary concern addressed by liquidity ratios, making that the correct choice.