Liquidity: Is the ease with which an

Liquidity is the ease with which an asset can be converted into cash without affecting its price. Learn about market liquidity and accounting liquidity , and how to measure them with ratios such as current, quick, and cash ratios. Liquidity is a method of interpreting a firm's proficiency in fulfilling its short-term obligations using cash—acquired from the sale of its current assets at a fair market price. Cash ratio, quick ratio, current ratio, and defensive interval ratios measure a company's financial health. Firms possessing more liquid assets have better credibility. They have sufficient working capital and cash reserves—better placed for business growth or expansion. Liquidity refers to how quickly and easily an asset or security can be converted into cash without significantly affecting its market price. High liquidity indicates that an asset can be sold rapidly at its current value. Liquidity is crucial for the smooth functioning of financial markets. It ensures that investors can buy and sell assets with minimal price changes, thereby reducing the risk and costs associated with trading. Liquidity can be measured by trading volume, bid-ask spreads, and ... 2. Accounting Liquidity Accounting liquidity is about an entity’s ability to meet a firm’s short-term obligations using current assets. It serves the following functions for managers, investors, and creditors: To creditors: Offers terms for the settlement of immediate debts. To investors: Refers to the health of the company’s operations and cash. To managers: Used to schedule daily and monthly expenses. This measure of liquidity is taken primarily in terms of financial ratios that ...