What are the disadvantage of liquidity ratio?

Answer 1

Liquidity ratios, while useful for assessing a company's ability to meet short-term obligations, have several disadvantages. They may not provide a complete picture of financial health since they focus solely on liquid assets and exclude long-term solvency. Additionally, liquidity ratios can be influenced by seasonal or cyclical fluctuations, leading to misleading conclusions if assessed in isolation. Finally, they do not account for the quality of assets, as some liquid assets may not be easily convertible to cash without significant losses.