Liquidity

Liquidity refers to a company's ability to meet its financial obligations as they come due. A liquid asset is one that can be easily converted into cash without significant loss of value. Liquidity is important for companies because it provides them with the flexibility to meet unexpected expenses or take advantage of new opportunities.

There are several measures of liquidity, including:

Current ratio: compares a company's current assets to its current liabilities. A ratio of 1.0 or higher is considered healthy.

Quick ratio: similar to the current ratio, but excludes inventory from current assets, as inventory can be more difficult to convert to cash quickly.

Cash ratio: compares a company's cash and cash equivalents to its current liabilities. This ratio indicates a company's ability to pay its short-term obligations with its most liquid assets.

Cash conversion cycle: measures how long it takes for a company to convert its resources into cash.

In general, a company with high liquidity is considered financially sound and less risky. However, a company that is too liquid may not be taking advantage of opportunities to invest and grow. It's important for a company to have an appropriate level of liquidity to meet its short-term needs while also investing in its long-term growth.

It is the ability of any asset or anything to get converted into cash without any hassle. The higher the market capitalisation, higher is the liquidity of that stock.