What does liquidity measure in an accounting context?

Liquidity in accounting refers specifically to a company's ability to satisfy its short-term obligations when they come due. This concept is crucial because it indicates how easily a company can convert its assets into cash or cash equivalents without significant loss in value, to meet immediate financial commitments, such as paying off debts or covering operational expenses.

When evaluating liquidity, financial ratios like the current ratio and quick ratio are often used. These ratios assess the company's current assets against its current liabilities to ensure that it has enough readily available resources.

In contrast, profitability measures how much profit a company makes relative to its expenses, which is not the focus of liquidity. Market share pertains to a company's portion of the industry sales, while long-term financial stability relates to a company's overall financial health and ability to sustain operations and growth over an extended period. Liquidity is distinct in that it emphasizes short-term financial health and stress resilience.