Liquidity Ratios - Meausres a businesses ability pay off its debts without raising external capital

Current Ratio - The ratio between the assets and the liabilities of a business.

Acid test - The same as the current ratio but takes into account the fact that a business is not certain that it sells all its inventory

Usefulness :

• Comparisons from year to year can be made
• Shareholders see whether an investment would be a good decision
• Certain ratios can be used to measure the performance of a business
• Suppliers and potential creditors gain an idea whether a business will be able to pay them back
• Ratios are useful for providing a source of information of where there are problems in the business
• Helps management in their decision making

Limitations:

• Inflation may distort figures
• External factors may distort the figures
• Some caution needs to be used as there are no set benchmarks for judging ratios