What defines a liquidity crisis?

A liquidity crisis is specifically characterized by a company's inability to meet its short-term financial obligations due to insufficient cash or cash equivalents. This condition typically arises when a company faces cash shortages, even if it possesses significant assets. The essence of a liquidity crisis lies in the immediate need for cash to fulfill obligations such as payroll, suppliers, and other operational expenses.

In contrast, other scenarios such as having excess cash or a situation where cash flow exceeds expenditures indicate financial health and the ability to cover obligations comfortably. Similarly, periods of high investment profitability do not inherently relate to liquidity; they reference investment returns rather than cash availability. Thus, the correct definition revolves around the challenges associated with cash shortages that prevent fulfilling short-term financial commitments.