Liquidity ratios indicate how capable a business is of meeting its short-term obligations. Liquidity is important to a company because when times are tough, a company without enough liquidity to pay its short-term debts could be forced to make unfavorable decisions in order to raise money (sell assets at a low price, borrow at high interest rates, sell part of the company to a vulture investor, etc.).

Current Ratio

What you need: Balance Sheet

The formula: Current Ratio = Current Assets / Current Liabilities

What it means: The current ratio measures a company’s ability to pay its short-term liabilities with its short-term assets. If the ratio is over 1.0, the firm has more short-term assets than short-term debts. But if the current ratio is less than 1.0, the opposite is true and the company could be vulnerable to unexpected bumps in the economy or business climate.

Quick Ratio 

What you need: Balance Sheet

The formula: Quick Ratio = (Current Assets – Inventory) / Current Liabilities

What it means: The quick ratio (also known as the acid-test ratio) is similar to the quick ratio in that it’s a measure of how well a company can meet its short-term financial liabilities. However, it takes the concept one step further. The quick ratio backs out inventory because it assumes that selling inventory would take several weeks or months. The quick ratio only takes into account those assets that could be used to pay short-term debts today.

Source: IA