Liquidity
Business: Edexcel IGCSE, topic 3.5.6
Liquidity
Liquidity is in an indicator of how a business is performing.
Liquidity
- Liquidity measures the extent to which a business has cash (or other current assets) to meet its immediate financial obligations.
Liquidity ratios
- The liquidity ratios include the current ratio and the acid test ratio.
- These ratios are particularly important to a business' creditors. If a company is likely to struggle meeting its short-term debts, then this suggests that the business is at risk.
Meaning of liquidity
- Businesses with higher liquidity ratios are better equipped to meet their short-term financial obligations.
- To truly understand the meaning of a liquidity ratio, it is helpful to compare it to historic data (ratios from previous years), or to the ratios of competitors.
- This will show if the business' liquidity is in line with current industry trends, or if it is an anomaly (and so more of a risk).
Test yourself on Liquidity
Are businesses with a higher or lower liquidity ratio better equipped to meet their short-term financial obligations?