Liquidity measures how quickly a company can turn its assets into cash to pay off short-term debts. Think of it as having enough ready money to cover bills and expenses as they come due. For example, assets like accounts receivable (AR) are highly liquid because they can be quickly converted to cash. However, if we take equipment or real estate, they’re less liquid since they take more time to sell and turn into cash.
Liquidity reflects a company's ability to meet its short-term obligations without external funding. Strong liquidity allows a company to handle expenses and debts as they come. Low liquidity can create hurdles for a company in managing bills and seizing chances for growth.
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