What does a company's liquidity refer to?

A company's liquidity specifically refers to its ability to meet short-term financial obligations. Liquidity is a measure of how readily a company can convert its assets into cash to pay off current liabilities, such as accounts payable and short-term debt. It indicates the financial health of a business in the short run and serves as a gauge for creditors and investors assessing the firm's capacity to manage operational costs and unexpected expenses effectively without needing to secure outside financing.

A firm with strong liquidity is better positioned to navigate financial challenges, while one with poor liquidity may struggle to fulfill its commitments promptly. Liquidity is often assessed using ratios such as the current ratio and quick ratio, which compare current assets to current liabilities to measure the firm’s short-term financial stability.