What is meant by liquidity in financial terms?

Liquidity in financial terms refers to the ability to convert assets into cash quickly without significantly affecting their market value. This concept is crucial for businesses and individuals alike, as it determines how readily available cash is for immediate use to meet obligations or invest in opportunities.

For instance, cash is the most liquid asset, while real estate is generally considered less liquid because selling property can take time and may involve complex processes and costs. Understanding liquidity helps businesses manage their cash flow effectively and ensure they can meet their short-term liabilities.

Profitability, funds available for investment, and the rate of return on investments deal with different aspects of financial health and performance but do not directly address the quick convertibility of assets into cash.