Liquidity Ratios measure the firm’s ability to meet current obligations

Ø Financial Ratio is a relationship between two financial variables. It helps to
ascertain the financial condition of a firm.
Ø Ratio analysis is a process of identifying the financial strengths and
weaknesses of the firm. This may be accomplished either through a trend
analysis of the firm’s ratios over a period of time or through a comparison of the
firm’s ratios with its nearest competitors and with the industry averages. The
four most important financial dimensions, which a firm would like to analyse,
are: liquidity, leverage, activity and profitability.
Ø Liquidity Ratios measure the firm’s ability to meet current obligations, and
are, calculated by establishing relationships between current assets and current
liabilities.
Ø Leverage Ratios measure the proportion of outsiders’ capital in financing the
firm’s assets, and are calculated by establishing relationships between borrowed
capital and equity capital.
Ø Activity Ratios reflect the firm’s efficiency in utilising its assets in generating
sales, and are calculated by establishing relationships between sales and assets.