FREE online courses on Financial Ratio Analysis - Question 1

 

How liquid is the firm?

 

The liquidity of a business is defined as its ability to meet maturing debt obligations.  That is, does or will the firm have the resources to pay the creditors when the debt comes due? 

 

There are two ways to approach the liquidity question. 

1.      We can look at the firm's assets that are relatively liquid in nature and compare them to the amount of the debt coming due in the near term.

2.      We can look at how quickly the firm's liquid assets are being converted into cash.