Liquidity: meaning, calculation and difference with solvency

What is liquidity?

Liquidity is the ability of a company or individual to meet short-term obligations with available liquid assets (cash or cash equivalents). A business with good liquidity can pay its bills on time, while low liquidity can lead to financial stress.

Common questions include:

• What does liquidity mean?

• How do you calculate liquidity?

• What is a healthy liquidity ratio?

Liquidity calculation: formulas and examples

1. Current ratio liquidity
   Current ratio = Current Assets ÷ Current Liabilities

2. Quick ratio liquidity
   Quick ratio = (Current Assets – Inventory) ÷ Current Liabilities

Liquidity vs solvency

Liquidity and solvency are related but different:

• Liquidity = short-term: can a company pay today’s bills?

• Solvency = long-term: can a company meet all obligations with its own capital?

That’s why companies are often assessed on three key metrics: liquidity, solvency, and profitability (rentability).

Liquidity in stocks and investing

Liquidity is also vital in financial markets:

• Stock liquidity → High liquidity means shares can be traded easily without big price changes. Penny stocks usually suffer from low liquidity.

• Liquidity in investing → Some investors prefer holding more liquid assets (cash or equivalents) to stay flexible.

• Improving liquidity → Businesses can increase liquidity by speeding up collections, optimizing inventory, or raising extra capital.

Liquidity in crypto

In the crypto market, liquidity is a major factor:

• Crypto liquidity meaning → The ease of buying and selling tokens without significant price fluctuations.

• Low liquidity crypto → Often leads to higher risks and price volatility.

• Exchanges like Bitvavo display liquidity levels for each coin.

Key takeaways

• Liquidity definition: Ability to pay short-term obligations with cash or near-cash assets.

• How to calculate liquidity: Current ratio, quick ratio, liquidity budget.

• Liquidity vs solvency: Short-term vs long-term financial health.

• Liquidity in markets: Higher liquidity = smoother trading in stocks and crypto.

• Improving liquidity: Better cash management, faster collections, stronger capital base.