Liquidity Ratio Law and Legal Definition

Liquidity ratio refers to the ratio between the assets of a person or entity in cash or liquid form and the amount of the current liabilities of the person or entity indicating the ability to pay current debts as they come due. The most common liquidity ratio is the current ratio, or current assets/current liabilities. An investor will look at liquidity ratios to determine the ability of an entity to pay off its short term obligations from cash or near cash assets. Liquidity ratios help investors to minimize the risk of investing in a wrong company.