What is a Liquid Asset?

//What is a Liquid Asset?
What is a Liquid Asset? 2017-10-05T06:26:20+00:00

Definition: A liquid asset is a resource that can easily be converted into cash and used to pay for goods and services or pay off liabilitiesAssets that can be readily traded for goods and services are also considered to be liquid even if they can’t be converted into cash. For instance, some stock isn’t readily converted into cash, but it can be used to barter with other companies and lenders.

What Does Liquid Asset Mean?

What is the definition of liquid asset? Assets are often judged based on their liquidity. You can think of this as a scale of how close the asset is to cash. Cash, itself, is the most liquid of all assets because it’s cash :). Other assets like cash equivalents are extremely liquid. US treasury bills can be converted into cash instantly at any bank. Equivalents are only one step away from cash itself. In most cases, equivalents are just as good as cash.

Example

Fixed assets like buildings, on the other hand, are difficult to sell and convert to cash. Larger and more expensive items that are hard to sell are not considered liquid because they aren’t readily converted to cash.

Companies without many liquid assets tend to do poorly because they need a certain amount to meet debt obligations and vendor expectations. Most financial analysts and creditors use liquidity ratios to measure the percentage of liquid assets a firm has and judge whether or not it will be able to make credit payments in the future.

Investors are also interested in the liquidity of a company because they want to know that the business will have enough funds to pay regular dividends and continue operations without going into financial hardship.

The statement of cash flows is also used by investors and creditors to analyze how a business uses its cash and maintains its liquidity.