What do liquidity measures assess in a company?

Liquidity measures are designed to evaluate a company's ability to meet its short-term financial obligations. These measures assess how easily a company can convert its current assets into cash to pay off debts that are due in the near future. This is crucial for maintaining operations and financial stability, as a company must have enough liquidity to handle immediate expenses such as payroll, supplier payments, and other operational costs.

Liquidity ratios, such as the current ratio and quick ratio, provide insights into the company’s short-term financial health by shining a light on its available resources. Effective liquidity management helps ensure that a company does not face solvency issues, which can lead to bankruptcy, even if it is profitable in the long term. This focus on current obligations is vital for stakeholders, including investors and creditors, as it indicates the risk associated with investing in or lending to the company.