Liquidity ratios answer: "Can this company pay its bills that are due soon?" They compare a company's liquid assets (cash, receivables, inventory) against its short-term liabilities (payables, short-term debt). If a company cannot meet near-term obligations, it faces a liquidity crisis — even profitable companies can go bankrupt from poor liquidity.
Three key ratios: Current Ratio = Current Assets ÷ Current Liabilities (should be > 1.5); Quick Ratio = (Current Assets − Inventory) ÷ Current Liabilities (should be > 1.0); and Cash Ratio = Cash ÷ Current Liabilities (most conservative). Each progressively strips out less-liquid assets.
Lehman Brothers had seemingly adequate capital ratios but failed because of a liquidity crisis — it could not roll over its short-term funding. This is why regulators introduced the Liquidity Coverage Ratio (LCR) under Basel III, requiring banks to hold enough liquid assets to survive 30 days of financial stress. Liquidity is to companies what oxygen is to humans — you do not notice it until it is gone.