Liquidity ratios help assess what type of risk?

Liquidity ratios are financial metrics used to evaluate a company's ability to meet its short-term obligations. By examining a company's current assets against its current liabilities, these ratios indicate how easily the company can convert assets to cash in order to cover its debts as they come due.

The focus of liquidity ratios is primarily on the company's operational efficiency and cash flow management, making them particularly relevant to credit risk. Credit risk refers to the possibility that a borrower will default on any type of debt by failing to make required payments. Investors and lenders utilize liquidity ratios to gauge whether a company possesses sufficient cash flow to manage its short-term debts, thereby assessing the likelihood of default. High liquidity indicates that the company is in a strong position to repay its obligations, which reduces credit risk for lenders and investors.

In contrast, market risk involves fluctuations in the value of investments due to market factors, operational risk relates to failures in internal processes or systems, and solvency risk pertains to the long-term financial health of a company and its ability to meet long-term obligations. These areas are not directly assessed through liquidity ratios.