Liquidity means availability of cash and assets and securities that can be converted into cash instantly in the firm. Maintaining high liquidity helps the company to meet its daily financial needs and to cover short-term financial obligations. It shows the cash position of the business.
Profitability means the amount of profit earned by the firm in a specific period of time. It can be determined by subtracting total expenses from total revenue of the business. Therefore, profitability reflects the financial performance of the company.
Difference Between Liquidity And Profitability
The major dissimilarities or difference between liquidity and profitability can be highlighted as follows:
1. Introduction
Liquidity: It refers to available cash or cash equivalents (assets or securities that can be converted into cash quickly) which helps to cover short term liabilities.
Profitability: It is a profit (Total revenue - Total expenses) made by a business firm in a certain period of time.
2. Shows
Liquidity: It shows the cash position or availability of cash in the firm.
Profitability: It shows the financial performance of the firm.
3. Calculation
Liquidity: It is calculated with the help of current ratio, quick ratio, acid test ratio, interest coverage ratio etc.
Profitability: It is calculated with the help of gross profit margin, net profit margin, return on capital employed etc.
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4. Importance
Liquidity: It is important to meet short term liabilities of the firm.
Profitability: It is important for long run survival of the firm.
Liquidity Vs Profitability (Comparison Chart)
Basis
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Liquidity
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Profitability
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Introduction
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available cash or cash equivalent in the firm
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Profit made by a firm in a certain period
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Shows
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Cash Position
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Financial performance
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Ratios
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Net profit margin, gross profit margin, return on capital employed etc.
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Importance
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Short term
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Long term
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Distinction Between Liquidity And Profitability In Short:
- Liquidity helps to measure the cash position of the company, on the other hand, profitability measures the financial performance of the company.
- Liquidity is important to meet short-term liabilities. But profitability is important in the long-run of the firm.
- Current ratio and quick ratio are used to determine the liquidity of the business firm. Gross profit margin and net profit margin are used to determine the profitability.
