What does liquidity measure for a company?

Liquidity measures a company's ability to meet its short-term financial obligations as they come due, usually within the next year. This is crucial for maintaining operational stability and ensuring that a company can cover its immediate liabilities without needing to secure long-term financing or liquidate assets at unfavorable prices.

The focus on short-term obligations is a key aspect of liquidity, which is often assessed using ratios such as the current ratio or quick ratio. These ratios compare current assets (like cash, accounts receivable, and inventory) with current liabilities to gauge whether a company has sufficient resources to pay its debts in the near term.

In contrast, other aspects listed—such as paying dividends, handling long-term debts, or assessing overall asset efficiency—are relevant but do not directly define liquidity. While long-term solvency and operational efficiency are important for a company's overall health, they address different concerns than those related to liquidity.