Liquidity ratios show how much cash and cash equivalents a company has. It effectively shows if the company is able to meet its obligations as they fall due from its cash reserves (and other assets that are readily turned into cash). A liquidity squeeze (lack of liquid assets) can lead a company to suspension of operations and bankruptcy and liquidity ratios tend to be quite important.
Liquidity ratios basically show the ability of the company to pay it’s short term liabilities (as they fall due) from it’s short term assets (accounts receivable, cash and other liquid assets).
The short term liabilities include tax expenses, accrued interest, trade payable and other current liabilities. In other words, the liquidity ratios show whether a company has enough short term assets to pay it’s short term liabilities.