The Liquidity Ratio is a financial metric used to assess a company's ability to meet its short-term obligations. It measures the relationship between a company's liquid assets, such as cash and accounts receivable, and its current liabilities. A higher liquidity ratio indicates a stronger ability to cover debts, which is crucial for maintaining financial stability. Common types of liquidity ratios include the Current Ratio and the Quick Ratio. The Current Ratio compares total current assets to total current liabilities, while the Quick Ratio excludes inventory from current assets. Both ratios help investors and creditors evaluate a company's short-term financial health.