What is the Definition of Liquidity?
Liquidity is how easily an asset can be turned into cash without affecting its price, with cash being the most liquid asset.
by Sai V
Updated Oct 20, 2023
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What is the Definition of Liquidity?
Liquidity refers to the ease with which an asset or security can be converted into ready cash without impacting its market price. Cash is the most liquid asset, while tangible items have lower liquidity. It is measured using ratios like current, quick, and cash ratios.
What Are Liquidity Ratios?
Here are the three key types of liquidity ratios used to gauge a company's financial health:
Current Ratio: The current ratio assesses a company's ability to settle short-term debts using its current assets, providing insight into its overall liquidity and financial health.
Quick Ratio: Also known as the acid-test ratio, the quick ratio measures a company's ability to cover immediate liabilities with its most liquid assets, excluding inventory, offering a more stringent assessment of liquidity.
Cash Ratio: The cash ratio specifically evaluates a company's ability to pay off short-term obligations using its available cash, providing a clear indication of its immediate liquidity strength.
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