Liquidity

What is Liquidity?

Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's price. In simpler words, liquidity is to get your money whenever you need it. Cash is considered the most Liquid asset, while real estate, collectibles and fine arts are all relatively illiquid.

Liquidity is the ease of converting tangible assets into cash and it has different connotations for different situations and contexts. Liquidity is the extent to which an asset can be bought or sold quickly without affecting the asset's price. Liquidity also plays an important role as it allows you to seize opportunities.

Liquidity Formula

From an accountant's perspective, liquidity is the ability of the current assets to meet the Current Liabilities. The existing current assets should be large enough to meet the liabilities. So, to measure whether there are sufficient current assets, a ratio called liquidity ratio is used.

This ratio is calculated as:

Liquidity Ratio = Current Assets / Current Liabilities