Last updated on
February 17, 2022

The degree, ease, or efficiency to which an asset can be quickly bought or sold in the market at a price that reflects its intrinsic value is referred to as liquidity. Cash is universally regarded as the most liquid asset because it can be converted into other assets the most quickly and easily. Real estate, fine art, and collectibles are all examples of tangible assets that are relatively illiquid. Other financial assets, ranging from equities to partnership units, are distributed across the liquidity spectrum in varying degrees.

The concept of a company's liquidity in finance and accounting refers to its ability to meet its financial obligations. The most commonly used liquidity measures are:

  1. Current Ratio, which refers to assets minus current liabilities.
  2. Quick Ratio, which refers to the ratio of only the most liquid assets (cash, etc.) to current liabilities.
  3. Cash Ratio, which refers to cash on hand in relation to current liabilities.

Nigerian Context

For example, if a Nigerian trader desires a 450,000 naira dry grains grinder, cash is the most easily obtained asset. If that person has no cash but rare public market paraphernalia valued at 450,000 naira, it is unlikely that they will find someone willing to trade them the grinder for their collection. Instead, they must sell the paraphernalia and use the proceeds to purchase the grinder. That may be fine if the person has months or years to make the purchase, but it may be a problem if the person only has a few days.

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