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What does 'liquidity' refer to in financial terms?

The profitability of a company

The capability of an asset to be converted into cash

Liquidity in financial terms fundamentally refers to the capability of an asset to be converted into cash quickly and without significant loss of value. Assets with high liquidity, such as cash and marketable securities, can be easily accessed and utilized for transactions or urgent needs, allowing businesses or individuals to meet their short-term financial obligations effectively.

This concept is essential for assessing a company's financial health since it indicates how easily the company can manage unexpected expenses or investments. While profitability, debt levels, and operational efficiency are critical aspects of a business's overall financial performance, they do not directly relate to the immediate availability of cash or cash-equivalents, which is the essence of liquidity. Thus, understanding liquidity helps stakeholders gauge the financial flexibility of a business.

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The amount of debt owed by a company

The operational efficiency of a business

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