What does the term 'liquidity' refer to?

Liquidity refers to the ability of a company to meet its short-term obligations as they come due, which is crucial for maintaining operational stability. When a company is considered liquid, it means it has enough current assets, like cash or assets that can quickly be converted to cash, to cover its liabilities that are due within the next year. Liquidity is essential for a company to ensure that it can pay off its debts and operational costs without needing to secure additional financing, which can be more challenging or costly.

While the capacity to sell assets quickly is related to liquidity, it doesn't fully encompass the entirety of what liquidity means; it's more about the company's current financial obligations rather than just the ease of asset sale. Profitability and cash reserves are important aspects of financial health, but they don't directly define liquidity. Profitability refers to a company's ability to generate profit over time, and cash reserves, while they can contribute to liquidity, do not alone determine a company's ability to meet upcoming financial obligations.