Difference Between Profitability vs Liquidity
In any company analysis, the two major parameters are profitability and liquidity, the two important criteria for a company to have creditworthiness and an increasing market capital and market share. Profitability vs Liquidity needs to be analyzed in detail. In this Profitability vs Liquidity article, we will try and understand the difference and the characteristics of the two in detail and explain why these parameters are important for a financial analyst.
Head To Head Comparison Between Profitability vs Liquidity (Infographics)
Below is the top 6 difference between Profitability vs Liquidity:
Key Differences Between Profitability vs Liquidity
let us discuss some of the major Difference Between Profitability vs Liquidity:
- Profitability refers to the company’s margin improvement; margins refer to revenue – cost the more the margins are increasing; it reflects enhanced profitability for that financial year. Profitability enhances the equity reserves and growth prospects of the company. On the other hand, liquidity refers to the ability of the firm to meet short-term and long-term obligations, which the business needs to pay in the long and short run, the current portion of liabilities.
- One of the key differences is that it is not necessary always that the profitable company is also liquid in nature because the company has invested heavily In future projects of the company from which the receivables are due after a considerable period of time. This major difference needs to be understood when making financial projections for any company. A company that is not liquid in nature can also go bankrupt in the short run because it does not have enough liquidity; that is why it needs working capital to meet short-term obligations.
- Profitability is a measure of business success; that is, how well the company is performing over a period of time; it is not an indication of how cash-rich the company is. It cannot tell the analyst the cash position of the company. Liquidity, on the other hand, tells us the cash position of the company, too much cash on the balance sheet also indicates poor working capital management of the company as the company is bearing the opportunity cost of cash lying idle on the balance sheet.
- Profitability is the financial performance measure of the company, which is indicated in the income statement and is reported as Net profit in the profit and loss account. The company bears losses in that period if the net profit is negative. Liquidity is present in the balance sheet on the current assets section of any company’s balance sheet, which includes marketable securities, prepaid expenses, and inventories apart from cash.
Profitability vs Liquidity Comparison Table
Below is the 6 topmost comparison between Profitability vs Liquidity
|
Profitability |
Liquidity |
| Profitability is for a period, and it is not a position for a particular time | Liquidity is for a particular time, as on date position, and not for a particular time period |
| Profitability is an income statement item and not a balance sheet item | Profitability is a balance sheet item and not an income statement item |
The Key ratios to determine the profitability of the company are:-
|
The Key ratios to determine the Liquidity of the company is:-
|
| Profitability is more important in the long run for the business | Liquidity is more important in the short run of the business |
| Profitability is a measure of financial performance | Liquidity is a measure of a cash position in the company and how liquid the company is to meet its short-term obligations |
| Profitability is also a degree of how well the company is generating margins from its business | Liquidity is the degree to how well the company can convert its sales into cash |
Conclusion
Both Profitability vs Liquidity is important for a business as it is a vital aspect of a company. If the company does not have enough cash, the working capital management will go for a toss, and the company needs to look for a working capital loan which will increase the interest cost of any business. Profitability is also vital as the company needs to analyze the reason for low-profit growth and focus on cost reduction.
Recommended Articles
This has been a guide to the top difference between Profitability vs Liquidity. Here we also discuss the Profitability vs Liquidity key differences with infographics, and the comparison table. You may also have a look at the following articles to learn more.
