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At a time when credit crunch is threatening businesses, stock-investors should pay extra attention to the financial strength of a company. In particular, investors would want to know a company's ability to meet short-term obligations, which may otherwise jeopardise its cash-flow situation.

There 2 popular measures of a company's short-term liquidity, the Quick Ratio and the Current Ratio.

Quick Ratio measures a company's ability to meet its short-term obligations with its most liquid assets. It is an indicator of a company's short-term liquidity. The higher the quick ratio, the better the position of the company.

The quick ratio is calculated as:

Quick Ratio = Current Assets - Inventory / Current Liabilites

Current ratio, a more well-known liquidity measure, excludes inventory from current assets. Inventory is excluded because some companies have difficulty turning their inventory into cash.

The quick ratio is more conservative than the current ratio. In the event that short-term obligations need to be paid off immediately, there are situations in which the current ratio would over-estimate a company's short-term financial strength.