Factors Of Liquidity
| Liquidity, a significant measurement of success of any business, is indicative of the fact that the business has sound accounting processes and a good control over its internal cash flows. It is also a vital tool for the business’ stakeholders, including the banks and the investors, to evaluate the business operations.More...
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Liquidity Importance
Till date, majority of investors go after stocks of technology companies ranging from Infosys Technologies to Mascon Global. Nonetheless, financial analysts have always discouraged the retail investors from purchasing certain stocks. Most of these stocks have a great growth potential, but are still not the recommended ones. Have you ever thought of the reason behind it? Well, the simple reason for this is that they are not at all liquid.
Liquidity is a vital factor that must be taken into consideration when making any investment. This is simply because liquidity can actually help you reverse the investment decisions. For instance, if you purchase 10 shares of an XYZ company at current value in a hope that the stock would climb in the coming fortnight. Now, if to your disappointment, the stocks fall, you may incur heavy losses if the stocks you purchased have no liquidity. On other hand, if the share is liquid, you can sell it off and reverse the investment made. Thus, liquidity holds a lot of importance.More...
What Is The Order Of Liquidity ?
Liquidity refers to the ease with which any item can get converted to cash or at least near to its present value within a period of one year. ‘Order of Liquidity’ usually refers to the order in which the balance sheet items are arranged depending on the extents to which they are liquid.
These items are typically arranged in a descending order of their liquidity. That is, cash, which is undeniably the most liquid asset of a company, appears first on the list of items in a balance sheet. It is followed by current assets of the company. Further, the various current assets are also arranged in descending order of their liquidities or the nearness of their character to cash. Thus, on the current assets’ list, accounts receivable appears first, followed by the inventory items. More...
How Do Finance Companies Manage Their Liquidity Risk ?
Financial institutions, especially the banks, manage liquidity risks by cautiously examining the relationship that exists between their current assets against their current liabilities. To be more precise, liquidity risk in a finance company can be managed by regulating its working capital requirements.
Liquidity risk management is accomplished by using stress tests on all the components of liquidity. These tests help to evaluate the possible effects on liquidity in case a change occurs in the prevailing conditions.More...
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