What are liquidity ratios used for?

Liquidity ratios are primarily used to assess a company's ability to cover short-term obligations using its liquid assets. These ratios provide insight into how well a business can meet its financial commitments that are due within a short time frame, typically one year.

The most commonly referenced liquidity ratios include the current ratio and the quick ratio, both of which compare a company's current assets (such as cash, accounts receivable, and inventory) to its current liabilities. A higher liquidity ratio indicates a better capacity to pay off these obligations, thus reflecting the company's financial health in the short run.

This focus on short-term financial stability distinguishes liquidity ratios from profitability metrics, which measure performance over a longer period, and from solvency metrics, which evaluate long-term debt coverage. Therefore, option C accurately reflects the primary purpose of liquidity ratios.