Liquidity ratio analysis provides us with an understanding that whether the company will be able to serve its short-term liabilities (current liabilities) with the help of its short-term assets (current assets). This helps an analyst understand whether the company has enough cash in the system to survive for atleast one operating cycle. Liquidity Ratios types include current ratios, quick ratio, cash ratio, defensive interval ratio and working capital ratio.
Cash ratio is the most common type of liquidity ratio that measures the liquidity of the company and considers only the Cash and Cash Equivalents.
Liquidity can be defined as a firm’s ability to meet the current liabilities of the current assets it has. Solvency, on the other hand, can be defined as the ability of the company to run its operations in the long run.