Liquidity refers to the ability of a firm to meet its financial obligations in the short-term which is less than a year. Certain ratios, which indicate the liquidity of a firm, are 

(i) Current Ratio, 

(ii) Acid Test Ratio, 

(iii) Turnover Ratios. 

It is based upon the relationship between current assets and current liabilities.

i. Current Ratio = \(\cfrac{Current \,Assest}{Current \,liabilities}\)

The current ratio measures the ability of the firm to meet its current liabilities from the current assets. Higher the current ratio, greater the short-term solvency .

ii. Acid-test Ratio = \(\cfrac{Quick \,Assest}{Current \,liabilities}\)

Quick assets are defined as current assets excluding inventories and prepaid expenses. The acid-test ratio is a measurement of firm's ability to convert its current assets quickly into cash in order to meet its current liabilities.

iii. Inventory Turnover Ratio = \(\cfrac{Cost \,of\,Goods\,Sold}{Average \,Inventory}\) 

Turnover ratios measure how quickly certain current assets are converted into cash or how efficiently the assets are employed by a firm.