Why is liquidity important in analysis of financial statements?
QUESTION
Why is liquidity important in analysis of financial statements? Explain its importance from the viewpoint of more than one type of user.
Liquidity is very important part of financial statement analysis. For an investor considering an investment in a company, liquidity of the stock of the company will be important to measure the transaction costs for him/her. High liquidity implies low bid-ask spreads andlow transaction costs. So, investors will prefer sotocks with high liquidity. For a company, a minimum amount of capital is invested into liquid assets that can be liquidated in case of business requirement. High liquidity enables to
ate working capital requirements for the firm and enable efficient management of day to day business needs.In case of contingencies, a reserve fund/investment into liquid assets can be used to support. In financial statements, current ratio, quick ratio and cash ratios are commonly used liquity ratios to analyse this aspect of the company.
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