The liquidity ratio is a financial metric used to evaluate a company's ability to meet its short-term financial obligations without experiencing financial strain. It measures the proportion of a company's liquid assets, which can be quickly converted into cash, compared to its short-term liabilities. Typically, liquid assets include cash, marketable securities, and accounts receivable. The liquidity ratio provides insights into a company's liquidity risk, indicating whether it can cover its short-term debts using its readily available assets. A higher liquidity ratio suggests a stronger ability to meet short-term obligations, indicating financial stability and flexibility. Conversely, a lower ratio may signal potential difficulties in fulfilling short-term obligations, potentially leading to liquidity issues.