Definition: Liquidity is the degree a corporation or debtor is able to pay its debts as and when they fall due.
It is the ability of a firm to pay its SHORT-term obligations.
Liquidity logically compliments solvency, which is the ability of a corporation to meet its LONG-term obligations.
To analyze liquidity, financial ratios are used such as:
- Current Ratio: total current assets / total current liabilities
- Quick Ratio: ( total current assets - inventories - prepayments ) / total current liabilities
- Cash Ratio: ( cash and cash equivalents ) / current liabilities
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