Question

Discuss that either it is possible or not that a company is good in solvency but poor in liquidity. Explain and give reason and justify your answer in 500 words.

Answer 1

Yes it is possible for company to be sound in solvency and poor in liquidity management.

There are various companies who have adequate assets in their books of accounts but they are not having the adequate liquidity and those assets are not usually realizable in nature and those assets generally will be having difficulty in realising their value due to their illiquidity because markets will generally prefer assets which are highly liquid and highly realisable in nature but these companies will be more saturated in fixed assets and long-term Asset so they cannot be easily liquidated.

liquidity management is one of the important aspect of the financial management in which the company will be having ample cash on its books of accounts in order to Finance short term liability associated with the company and the company will be trying to finance the liability of the company by a regular debt repayment schedule because the company will be generating enough cash in the short run in order to finance all this financial short term liabilities but those companies which are not able to generate enough cash and those companies which are having a higher fixed asset in its books of accounts will be deemed to be in solvent in nature and they will be having lower liquidity and their books of accounts.

solvency of a company is generally decided by the comparison of overall assets to the liabilities of the company and if there is a higher saturation of the company assets into fixed assets and long-term assets, those assets will not be generating short term cash in nature and those are not realizable in short term period so they will not be having the enough liquidity but they will be having the ample solvency because the overall value of the Assets of the company including those fixed asset and long-term assets will be higher than the overall liability of the company.

these company who have a higher concentration of their assets in long term Assets and fixed asset will be lesser inclined towards generation of cash in shorter period because these long term assets will not be quickly generating shorter term cash and their liquidity will be always in danger because they will be not able to repay their debt obligation and they will still be having enough assets in their books of accounts when the overall solvency of the company is concerned.

so it can be summarised that there are many companies who have a higher concentration of their fixed assets in the overall assets portfolio and they are not able to generate enough cash in order to be liquid in nature to fund their short term debt repayment obligation.