To calculate liquidity, use the current ratio, calculated by dividing current assets by current liabilities (these both appear on the balance sheet).
As a general rule, a current ratio should exceed one, so that current assets exceed current liabilities.The higher the current ratio, the more liquid a company is.
If they are not able to meet their obligations as they come due, firms with poor liquidity can go bankrupt .
To determine whether a company has sufficient liquidity, you may wish to look at the current ratio over the past few years. If it seems low (say, 80%), but has been running at this rate for the past few years, then the company probably has sufficient liquidity.
[Image: Blue and Red by Tambako the Jaguar, on Flickr]