Liquidity ratios are calculated to measure the short-term solvency of the business, i.e., the firm's ability to meet its current obligations. These are analysed by looking at the amounts of current assets and current liabilities in the balance sheet. The two ratios included in this category are current ratio and liquidity ratio.

Current ratio is the proportion of current assets to current liabilities. It provides a measure of the degree to which current assets cover current liabilities. The excess of current assets over current liabilities provides a safety margin against uncertainty in realisation of current assets. A very high current ratio implies heavy investment in current assets reflecting under utilisation of resources. A low ratio endangers the business and affects the firm's credit worthiness adversely. Normally, it is safe to have this ratio within the range of 2:1.

Quick ratio (or Liquid ratio) is the ratio of quick assets to current liabilities. Quick assets exclude inventories and other current assets such as prepaid expenses and advance tax from current assets. It is considered better than current ratio as a measure of liquidity position because of exclusion of non-liquid current assets. It is also known as 'Acid-Test Ratio'.

It is safe to have a quick ratio of 1:1. A low ratio is risky while a high ratio suggests unnecessary deployment of resources in less profitable short-term investments. Both ratios together help assess the short-term financial health of a business.