Liquidity refers to how quickly and easily an asset can be converted into cash without losing significant value. Cash itself is the most liquid asset. Real estate, on the other hand, is illiquid — selling a property takes time and negotiation.
For businesses, liquidity means having enough cash or near-cash assets to pay bills as they come due. A company might be profitable on paper but still go bankrupt if it runs out of liquid cash — this is called a liquidity crisis.
Common liquidity ratios include the current ratio (current assets / current liabilities) and the quick ratio (liquid assets / current liabilities). A ratio above 1.0 generally signals healthy liquidity.