Distinguish between profitability and liquidity.

Question

Distinguish between profitability and liquidity.

Banking & FinanceFinance ManagementGrowth & Empowerment

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The major differences between profitability and liquidity are as follows −

Profitability

• Profit made by the company in a period/during a year.
• May not have enough liquidity.
• A company which is profitable can go for bankrupt if it does not have liquidity in short term.
• Present in income statement.
• Determines Gross profit margin, net profit margin, EBIDTA margin, EBIT margin, CAGR.
• Measures financial performances.
• Tells about how good is company is able to generate margins form its business.
• Long term.

Liquidity

• How much of cash is available by a company at point of time.
• May not be profitability.
• A company which has liquidity but nor profitable can’t go for bankrupt.
• Present in balance sheet.
• Determines current ratio, acid test ratio, quick ratio, interest coverage ratio, fixed coverage ratio.
• Measures cash position.
• Tells about how good company is able to convert its sales into cash.
• Short term.

Mandalika

Published on 25-Sep-2020 17:26:03

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