What are Liquid Assets? Definition and meaning
Liquid assets, also known as quick assets, are current assets that we can turn into cash quickly. Quickly, in this context, means within about one month. The most liquid asset is cash, i.e., banknotes and coins. Checking accounts are also very liquid.
A liquid asset is nearly as liquid as cash. It experiences negligible changes in price when we try to sell it. In other words, the difference between how much we pay for it and sell it for is very small or zero.
If you try to sell this asset, you will find many willing buyers in the market. This subsequently helps maintain its price.
A company rich in liquid assets can usually pay its bills on time. A company with mainly illiquid assets, on the other hand, has more problems.
We call an asset which we cannot convert into cash quickly an illiquid asset.
The Economic Times has the following definition of the term:
“An asset is said to be liquid if it is easy to sell or convert into cash without any loss in its value.”
Gold and silver are liquid assets because we can convert them into cash or cash equivalents easily.
Examples of liquid assets:
- money market instruments
- money deposited into a savings or checking account
- government bonds
- gilt-edged securities
- demand and time deposits
- accounts receivable (money owed to a company by customers) and inventories
Liquid assets and liquidity metrics
Calculating Current Ratio and Working Capital
According to the 2013 Basel Accords definition, there is a Level 1 liquid asset and also a Level 2.
– Level 1 Assets consist of highly-rated foreign sovereign debt and bank reserves. This category also includes domestic sovereign debt.
– Level 2 Assets are a little bit less liquid. This category includes top corporate bonds and lower-rated foreign sovereign debt.
We include these types of assets in several calculations to determine a company’s liquidity.
A company’s cash ratio, for example, tells us whether it could use its liquid assets to pay off its current liabilities. We calculate cash ratio by adding all cash and cash equivalent and dividing the total by short-term obligations.
Current assets include all liquid assets plus other assets that we can convert into cash within one year.