Liquidity

What is Liquidity?

Liquidity refers to the ease with which an asset or security can be converted into cash without impacting its market price. It is a crucial aspect of both personal finance and corporate balance sheets, as it dictates the ability to meet short-term obligations.

Short Description: The ability of an asset to be quickly converted into cash without significantly affecting its market price.

• Importance: High liquidity indicates a company or individual's capacity to settle debts and maintain financial stability.
• Liquidity Ratios: Measures such as the current ratio and quick ratio are used to evaluate an entity's liquidity.
• Cash & Cash Equivalents: These are considered highly liquid assets.
• Marketable Securities: Financial instruments that can be easily sold are also classified as liquid assets.

Liquidity is a key indicator of financial health, influencing strategic decisions such as reinvestment, expansion, and fulfilling obligations.