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Business Basics: Liquidity

February 19th, 2014

 

Liquidity is a measure that represents an ability to pay short-term expenses. Liquidity also represents having a large number of assets that specifically can be converted to cash easily, such as blue chip and money market securities.

 

When used in the context of a company, liquidity is a measure that allows an investor to look closely at the financial health of a company. If a company suddenly has unexpected expenses, it is important that it has a high liquidity so that it can sell some of its assets to pay for those expenses.

 

Investors also use liquidity measurements, such as the current and quick ratios, to determine if a company can meet its financial obligations, and is carrying proper amounts of debt and equity. The current ratio is current assets divided by current liabilites. The quick ratio is current assets minus inventory divided by current liabilities.

 

– Information compiled by Anthony Ahlegian