In this article, you will get know the basic difference of profitability and liquidity. Some people get confuse between these two words. The actual meaning of profitability is a profit made by a company, on other side Liquidity states the visibility of liquid cash with a company. There are five general key differences as follow below:
- Profitability refers to profits which the company has made during the year which is calculated as difference between revenue and expense done by the company, whereas liquidity refers to availability of cash with the company at any point of time.
- A profitable company may not have enough liquidity because most of the funds of the company are invested into projects and a company which has lot of cash or liquidity may not be profitable because of lack of opportunities for putting idle cash.
- Gross profit, net profit, operating profit, return on capital employed are some of the ratios which are used to calculate profitability of the firm while current ratio, liquid ratio and cash debt coverage ratio are some of the ratios which are used to calculate liquidity of the firm.
- A company which is profitable can go bankrupt in the short term if it does not have liquidity whereas a company which has liquidity but is not profitable cannot go bankrupt in the short term.
- The company has to maintain a fine balance between the two because if company focuses on too much profitability then it runs the risk of not able to pay its creditors, employees and other parties whereas on the other hand if company focuses on liquidity and then it runs the risk of going into loss.
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