One of the indicators of the company isliquidity level. It assesses the organization's creditworthiness, its ability to fully and pay for obligations in time. More details about what liquidity ratios exist, formulas for the new balance for calculating each indicator are presented in the article below.
Essence
Liquidity is the degree of coverage of the assets of the company. The latter are divided into groups depending on the period of conversion into cash. For this indicator is estimated:
- firm ability to respond quickly to financial problems;
- the ability to increase assets with sales growth;
- opportunity to repay debts.
Degrees of liquidity
Insufficient liquidity is expressed in the absence ofopportunities to pay debts and commitments. We have to sell fixed assets, and in the worst case - to eliminate the organization. The deterioration of the financial situation is reflected in the reduction of profitability, loss of capital investments of owners, delayed payment of interest and part of the principal debt on the loan.
Quick ratio (formula forthe balance for the calculation will be presented below) reflects the ability of an economic object to repay the debt from the available funds in the accounts. Current solvency can affect relationships with customers and suppliers. If the company is not able to repay the debt in time, its continued existence is in doubt.
Any liquidity ratio (balance formulafor calculation will be presented below) is determined by the ratio of assets and liabilities of the organization. These indicators are divided into four groups. Similarly, any liquidity ratio (the balance formula for the calculation is needed for analyzing activities) can be determined separately by quickly and slowly realizing assets and liabilities.
Assets
Liquidity is the ability of the propertybusinesses generate a certain income. The speed of this process just reflects the liquidity ratio. The balance formula for the calculations will be presented below. The bigger it is, the better the enterprise is “on its feet”.
Let's rank the assets by the speed of their conversion into cash:
- money in the accounts and at the box office;
- bills, treasury securities;
- overdue indebtedness to suppliers, loans issued, securities of other enterprises;
- stocks;
- equipment;
- structures;
- WIP.
Now we will distribute the assets into groups:
- A1 (the most liquid): funds on hand and on a bank account, shares of other enterprises.
- A2 (fast-selling): short-term counterparty debt.
- A3 (slow-moving): stocks, WIP, long-term financial investments.
- A4 (difficult to implement) - non-current assets.
A specific asset belongs to a groupdepending on the degree of use. For example, for a machine-building plant, a lathe will refer to "inventory", and an assembly made specifically for the exhibition will belong to non-current assets with a useful life of several years.
Liabilities
The liquidity ratio, the formula for the balance of which is presented below, is determined by the ratio of assets to liabilities. The latter are also divided into groups:
- P1 - the most popular obligations.
- P2 - loans valid for up to 12 months.
- P3 - other long-term loans.
- P4 - reserves of the enterprise
The rows of each of the listed groups should coincide with the degree of liquidity of assets. Therefore, it is advisable to modernize the financial statements before making calculations.
Balance sheet liquidity
For further calculations, it is necessary to compare the monetary estimates of the groups. In this case, the following relations should be fulfilled:
- A1> P1.
- A2> P2.
- A3> P3.
- A4
If the listed conditions are satisfied firstthree, then the fourth will be executed automatically. However, the lack of funds in one of the groups of assets cannot be compensated for by an excess of the other, since quick-selling funds cannot replace slow-moving assets.
In order to conduct a comprehensive assessment, the total liquidity ratio is calculated. The formula for the balance:
L1 = (A1 + (1/2) * A 2 + (1/3) * A3) / (P1 + (1/2) * P2 + (1/3) * P3).
The optimal value is 1 or more.
Information presented in this way is not replete with details. A more detailed calculation of solvency is carried out by a group of indicators.
Current liquidity
The ability of a business entity to repay short-term liabilities at the expense of all assets shows the current ratio. The formula for the balance (line numbers):
Ctl = (1200 - 1230 - 1220) / (1500 - 1550 - 1530).
There is also another algorithm by which you can calculate the current liquidity ratio. The formula for the balance:
K = (OA - long-term DZ - the debt of the founders) / (krat. Required) = (A1 + A2 + A3) / (Π1 + Π2).
The higher the value the bettersolvency. Its standard values are calculated for each branch of production, but on average they range from 1.49-2.49. A value of less than 0.99 indicates the inability of the enterprise to pay on time, and more than 3 indicates a high proportion of unused assets.
The ratio reflects the solvencyorganizations not only at the moment, but also in extraordinary circumstances. However, it does not always provide a complete picture. In commercial enterprises, the value of the indicator is less than the normative, and in industrial enterprises, it is more often.
Urgent liquidity
The ability of a business entity to repay liabilities at the expense of marketable assets less inventories reflects the quick liquidity ratio. The formula for the balance (line numbers):
Xl = (1230 + 1240 + 1250) / (1500 - 1550 - 1530).
Or:
K = (krat. DZ + krat. Financial investments + DS) / (krat. Loans) = (A1 + A2) / (Π1 + 2).
In the calculation of this ratio, as well as the previous one, the stocks are not taken into account. From an economic point of view, the implementation of this group of assets will bring the company the most losses.
The optimal value is 1.5, the minimum is 0.8.This indicator reflects the proportion of liabilities that can be covered by cash flows from current activities. To increase the value of this indicator should increase the volume of own funds and attract long-term loans.
As in the previous case, the value of the indicatormore than 3 indicates an irrationally organized capital structure, which is caused by the slow turnover of stocks and the growth of receivables.
Absolute liquidity
The ability of a business entity to repay debt for cash reflects the absolute liquidity ratio. The formula for the balance (line numbers):
Cal = (240 + 250) / (500 - 550 - 530).
The optimal value is more than 0.2, the minimum is0.1. It shows that an organization can pay off 20% of its immediate obligations immediately. Despite the purely theoretical probability of the need to urgently repay all loans, you must be able to calculate and analyze the absolute liquidity ratio. The formula for the balance:
K = (short. Investment + DS) / (short. Loans) = A1 / (Π1 + 2).
The calculations also use the critical liquidity ratio. The formula for the balance:
Kcl = (A1 + A2) / (P1 + P2).
Other indicators
Capital maneuverability: А3 / (AO - А4) - (П1 + П2).
Its decrease in dynamics is considered as a positive factor, since part of the funds frozen in inventories and receivables is released.
The proportion of assets in the balance sheet: (total balance - A4) / total balance.
Security with own funds: (A4 - A4) / (AO - A4).
An organization must have at least 10% of its own sources of financing in the capital structure.
Net working capital
Данный показатель отражает разницу между current assets and loans, payables. This is the part of the capital that is formed at the expense of long-term loans and own funds. The formula for the calculation is:
Net capital = OA - short-term loans = p. 1200 - p. 1500
Excess of working capital over liabilitiestestifies that the enterprise is capable to pay off debts, has reserves for expansion of activity. The standard value is greater than zero. The lack of working capital indicates the inability of the organization to repay obligations, and a significant excess - irrational use of funds.
Example
On the balance sheet of the company are:
- Cash (DS) - 60 000 rubles.
- Short-term investments (KFW) - 27,000 rubles.
- Receivables (DZ) - 120 000 rubles.
- OS - 265 thousand rubles.
- IA - 34 thousand rubles.
- Stocks (PZ) - 158 000 rubles.
- Long-term loans (CP) - 105 000 rubles.
- Short-term loan (CC) - 94 000 rubles.
- Long-term loans - 180 thousand rubles.
It is necessary to calculate the absolute liquidity ratio. The formula for calculating:
Cal = (60 + 27) / (105 + 94) = 0.4372.
The optimal value is more than 0.2. The company is able to pay 43% of liabilities at the expense of funds in a bank account.
Calculate the quick ratio. The formula for the balance:
Xl = (50 + 27 + 120) / (105 + 94) = 1.09.
The minimum value of the indicator is 0.80. If the company uses all available funds, including debts owed by customers, then this amount will be 1.09 times more than existing liabilities.
Calculate the critical liquidity ratio. The formula for the balance:
Kcl = (50 + 27 + 120 + 158) / (105 + 94) = 1,628.
Interpretation of results
The coefficients themselves do not carry semanticload, but in the context of time intervals, they describe in detail the activities of the enterprise. Especially if they are supplemented by other calculated indicators and a more detailed consideration of the assets that are taken into account in a particular balance sheet.
Illiquid stocks cannot be quickly realized or used in production. They should not be taken into account when calculating current liquidity.
In an organization that is part ofholding group, when calculating the liquidity ratio, the indicators of internal receivables and payables are not taken into account. The level of solvency is better determined according to the absolute liquidity ratio.
Много проблем вызовет завышенная оценка активов.Inclusion in calculations of collection of improbable debt leads to incorrect (reduced) assessment of solvency, obtaining unreliable data on the financial position of the organization.
On the other hand, when excluding assets from calculations, the probability of receiving incomes from which is low, it is difficult to achieve standard values of liquidity indicators.
