Lecture Notes: Liquidity and Profitability

Liquidity

• Definition: Liquidity refers to how easily an asset or security can be converted into cash without affecting its market price.
  • Key Concept: Degree to which an asset can be quickly bought or sold at a price reflecting its intrinsic value.
  • Cash: Considered the most liquid asset because it can be quickly and easily converted into other assets.
  • Use: Used to pay for expenses such as employee payroll, rent, utilities, and other production necessities.

Measures of Liquidity

1. Market Liquidity

   • Refers to the extent to which a market (e.g., stock market, real estate market) allows assets to be bought or sold at stable, transparent prices.

2. Accounting Liquidity

   • Refers to the ease with which individuals or companies can meet their financial obligations using available liquid assets.

Profitability

• Definition: The ability of a company to use its resources to generate value in excess of its expenses.
  • Importance: Indicates a company's capability to generate profit.
  • Stakeholder Interest: Investors, creditors, and managers use profitability to analyze company performance and future potential.

Key Indicators of Profitability

• Revenue: Business income earned from customers by selling products or providing services.
• Expenses: Costs incurred by the business.

Profitability Analysis

• Examines the relationship between revenue and expenses to assess company performance and future potential.