Liquidity vs Solvency | Know the Top Differences!

Liquidity vs Solvency | Know the Top Differences!


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is liquidity vs solvency are they two the same thing i guess no there is difference
between them so lets understand the difference and see what is exactly going on around liquidity
and solvency see before making any investment its very important to know two factors whether
the investment will maintain the liquidity of the company and whether the investment
of the company is making would keep solvency of the company there are two statements i
will again repeat the two factors whether the investment will maintain the liquidity
of the company and whether the investment the companies making would keep the solvency
of the company okay so many investors own themselves with the meaning of liquidity and
solvency so as a result the user this terms inter changeable however this two our entirely
different from each other see liquidity can be define L and S over here liquidity basically
can be defined as the firms ability to mean the current liabilities of the current assets
it has okay liquidity’s is the short term concept you can say and also one of the most
important one because without liquidity of the firm won’t be able to pay off its immediate
liabilities okay so we use this ratio like current ratio sorry your current ratio we
use quick ratio we use cash ratio which is known as your CR to determine the liquidity
of the company but when we talk about your solvency solvency on the other hand can be
define as the ability of the firm to run its operation in the long term that means in the
solvency is q long term concept as simple is that and the investment ca affect both
of this but they are much different there is there is much difference different then
each other both of them are different from each other so let’s learn liquidity vs solvency
in info-graphics method so as you can see the each of this concept are much different
here the most significant difference that that is between the liquidity in the solvency
so lets understand from this info-graphics liquidity vs solvency the first that we will
to understand that is the meaning liquidity can be define as the ability of the firm we
have just discuss to pay of its current liability with the help of its current assets while
solvency is basically the level of situation or ability of the firm to operate to run the
business for a longer period of time now second point of difference what its all about? Liquidity its a short term concept absolutely
because liquidity in itself involve what your current assets and your current liability
and when this 2 things are involved absolutely the liquidity has to be short term concept
in nature and because cash and cash equivalents to pay off its current debts while solvency
its a long term concept of how well the operations of the firm would run so this is the second
point of difference the third point of difference that we are going to understand is the obligations
now liquidity it has a short term obligation because it involves current assets and current
liability while solvency it has a long term responsibility now the fourth point of different
why understand this? liquidity it is basically know how fast the current assets can be converted
into cash as well now what about solvency it is basically whether the firm can perpetuate
again and again year after year whether it can stay solvent whether it can be a going
concern situation whether the companies are going concern case or not so its going to
perpetuate again and again year after year then 5th risk now over here in case of current
assets and current liabilities the risk is really very low because everything will be
on a short term no everything will get convert it but in case of the solvency the risk is
really high and absolutely you cannot deny the fact what to look in the balance sheet
now current assets and current liabilities we now know very well when we will talk about
liquidity term current assets and current liabilities has to come into picture and the
detail account of every items we need them under current assets and current liabilities
when we talk about solvency solvency is all about companies shareholding patterns or shareholder’s
equity what is the amount of debt it is holding any long term assets if any so all those are
some of the solvency criteria now what are the ratio use we just discuss current ratio
and the quick ratio which is also known as your asset test ratio so liquidity purpose
but when we talk about solvency debt to equity ratio now deb to equity ratio is one of the
key measure for your solvency interest coverage ratio there is one more called DSCR ratio
that is debt service coverage ratio in finance industry DSCR ratio is very famous and it
is the most in case of the interest and debt coverage so this are the ratios which are
the key drivers determine of the solvency impact on each other when we talk about liquidity
if solvency is high liquidity can be achieved absolutely and within a short period of time
because solvency will lead to your liquidity but if liquidity in over here if liquidity
is high solvency may not be achieved very quickly absolutely that its undoubtable fact
that we cannot deny now lets understand the key differences between L and S that is your
liquidity and your solvency when we talk about key differences as you can you know we just
already saw liquidity and solvency cannot be interchange and they are completely different
from each other lets look at some of the key differences between liquidity and solvency
see liquidity can be define as the firms ability to pay its current liability with the help
of the current assets and solvency on the other hand is the is an individual or the
firms ability to pay off its long term debt in on an long term note second liquidity is
basically the short term concept while your solvency is basically your long term concept
a third point of difference liquidity can be found out by using the ratios like current
ratio quick ratio and over here we have the ratio like debt to debt to equity ratio and
we have ratio like DSCR ratio or interest coverage ratio and interest coverage not or
concept while liquidity has no risk you can say and over here high risk right liquidity
needs to be understood to know how quickly a firm will be able to convert its current
assets to into cash and solvency on the other hand talks about whether the firm has the
ability to send the cash flow for the long period of time so based on this after understanding
all the differences and the key differences let me finally conclude on this note as you
can see you know liquidity and solvency both are very important concept absolutely for
a business but they cannot be use interchangeably because they are completely different in the
nature in this scope okay and in case of they purpose right liquidity can basically insure
you know whether the firm will pay off its immediate debt and solvency on the other hand
you can say that on the other hand handles the long term debt and the firms ability to
perpetuate so once you understand this concept you could be able to come up as analyst so
you would also be able to make a quick and effective decision about any next move that
you are suppose to take for your business so that’s it for this particular topic if
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