What do liquidity ratios indicate?

Liquidity ratios are critical financial metrics that assess a company's ability to cover its short-term obligations with its most liquid assets. These ratios, such as the current ratio and quick ratio, provide insights into the company's financial health, specifically in the short term.

When focusing on short-term financial obligations, liquidity ratios evaluate how well a company can pay off its current liabilities without needing to liquidate long-term assets. A higher liquidity ratio indicates a stronger position to manage debts as they come due, which can enhance creditor confidence and reduce the risk of financial distress.

In contrast, the other choices focus on different aspects of a company's performance or attributes, such as profitability, market share, and cost of goods sold, which do not relate to the immediate financial liquidity of the business. Thus, the key role of liquidity ratios lies in their assessment of short-term financial stability and operational efficiency.