What is the difference between liquidity and liquidation?
Liquidity usually refers to a company’s ability to pay its bills when they become due. Liquidity is often evaluated by comparing a company’s current assets to its current liabilities. Working capital, the current ratio, and the quick ratio are referred to as liquidity ratios or short-term solvency ratios, since their calculations use some or all of the current assets and the current liabilities. Sometimes a company’s accounts receivable turnover ratio, inventory turnover ratio, and free cash flow are also used to assess a company’s liquidity.
Liquidation is a term commonly used when a company sells parts of its business for cash, or when it sells assets in order to pay debts. Liquidation may also involve the winding down or the closing of a business.
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