What are liquidity ratios and how is it important in telling me whether or not it is a good choice to invest in a certain company?

Hi!

Liquidity ratios are those which help you to assess the ability of a firm to repay its debts. This is important for investors in both debt and equity instruments. For the debt owner, if the company is unable to repay their claims, they will lose their capital. Equity owners will receive income through dividends only after the debt obligations are clear. Hence, having a good liquidity ratio shows that the company will be able to repay its obligations.

Liquidity ratios can be as follows:

1. Current Ratio
2. Quick Ratio
3. Operating Cash Flow Ratio

However, agreeing with the others, these ratios are only helpful when used in comparison to other firms. Then we can take a call upon which company has a better liquidity position than the other. These numbers in isolation will not make much sense.

I work at kristal.AI, and it's my passion to evaluate various upcoming investment opportunities.

Going to be a bit controversial here but I'd say these ratios are useless for deciding which companies to invest in.

Happy to be corrected by anyone who is serious trader who could share their experiences