What does the term "liquidity" refer to in financial terms?

The term "liquidity" in financial terms specifically refers to the ease with which assets can be converted into cash without significantly affecting their value. This concept is crucial for assessing a company's ability to meet its short-term obligations. In practice, liquid assets include cash itself, as well as assets that can be quickly sold or liquidated, such as marketable securities and inventories, particularly those that are expected to sell quickly.

In the context of financial analysis, understanding liquidity is essential for evaluating the financial health of a business. Companies with high liquidity can easily handle unexpected expenses or downturns in revenue. Meanwhile, liquidity is distinct from other financial metrics, such as revenue generation, solvency, and net income, which measure different aspects of a company’s performance and financial stability.