#Liquidity101 ✅

is a label commonly used to introduce the concept of liquidity in finance, a fundamental pillar for both investors and companies. Understanding liquidity is essential for assessing financial health and the ability to meet short-term obligations. 

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💧 What is liquidity?

Liquidity refers to the ease with which an asset can be converted into cash without significantly affecting its market value. For example, cash is the most liquid asset, while assets such as property or art are less liquid due to the time and effort required to sell them without significant losses. 

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🔍 Types of liquidity

1. Market liquidity: Indicates the ease with which an asset can be bought or sold in the market without causing large fluctuations in its price. Markets with high liquidity allow for quick and efficient transactions.  

2. Accounting liquidity: Assesses a company's ability to meet its short-term financial obligations using its current assets. It is measured using financial ratios such as the current ratio and the quick ratio.  

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📊 Key liquidity ratios

• Current ratio: Calculated by dividing current assets by current liabilities. A value greater than 1 indicates that the company can cover its short-term debts.

• Quick ratio (acid-test): Similar to the current ratio, but excludes inventories and other less liquid assets. It provides a more conservative view of liquidity. 

• Cash ratio: Measures a company's ability to pay its short-term obligations using only cash and cash equivalents. 

These ratios are key tools for investors and creditors when assessing the solvency and financial stability of the company.