Liquidity

Written by Fmi.Online Friday January 6, 2023
Liquidity refers to the availability of cash or cash equivalents to meet short-term operating needs. In other words, liquidity is the amount of liquid assets that are available to pay expenses and debts as they become due. Obviously, the most liquid asset of all is cash.

Explanation :

 

Creditors and investors often use liquidity ratios  to gauge how well a business is performing. Since creditors are primarily concerned with a company’s ability to repay its debts, they want to see there is enough cash and equivalents available to meet the current portions of debt.

In a nutshell :

 
  • Liquidity refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price.
  • Cash is the most liquid of assets, while tangible items are less liquid. ...
  • Current, quick, and cash ratios are most commonly used to measure liquidity.
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