2.6. LIQUIDITY ANALYSIS
Purpose of liquidity analysis - assess the company’s ability to fully meet short-term obligations on a timely basis using current assets.
Liquidity (current solvency) is one of the most important characteristics of the financial condition of an organization, which determines the ability to pay bills on time and is actually one of the indicators of bankruptcy. The results of liquidity analysis are important from the point of view of both internal and external users of information about the organization.
2.6.1. Calculation and interpretation of key indicators
To assess liquidity, the following indicators are used (Table 10, p. 198):
Total liquidity ratio characterizes the ability of an enterprise to fulfill short-term obligations at the expense of all current assets. Classically, the total liquidity ratio is calculated as the ratio of current assets (current assets) and short-term liabilities (current liabilities) of an organization.
The current liabilities of the Russian Balance Sheet contain elements that, by their nature, are not obligations to be repaid - these are future income and reserves for future expenses and payments. When assessing an organization’s ability to pay short-term obligations, it is advisable to exclude these components from current liabilities.
The items listed above are reflected in current liabilities.
All indicators used in the calculations must refer to the same reporting date.
Absolute (instant) liquidity ratio reflects the ability of an enterprise to fulfill short-term obligations using free cash and short-term financial investments
Quick (intermediate) liquidity ratio characterizes the ability of an enterprise to fulfill short-term obligations at the expense of the more liquid part of current assets.
When calculating this indicator, the main issue is the division of current assets into liquid and low-liquid parts. This question in each specific case requires a separate study, since only cash can unconditionally be classified as the liquid part of assets.
In the classic version of calculating the intermediate liquidity ratio, the most liquid part of current assets is understood as cash, short-term financial investments, non-overdue accounts receivable (accounts receivable) and finished products in the warehouse.
For enterprises that have significant reserves for future expenses and (or) future income, liquidity ratios calculated without adjusting current liabilities will be unjustifiably underestimated. It is necessary to take into account that the liquidity indicators of Russian enterprises are already low.
When calculating an enterprise's liquidity indicators, fewer difficulties arise than when interpreting them. For example, managerial interpretation of the absolute liquidity indicator in fractional terms (0.05 or 0.2) is difficult. How to assess whether the resulting value is optimal, acceptable or critical for the enterprise? To obtain a clearer picture regarding the liquidity status of an enterprise, it is possible to calculate a modification of the absolute liquidity ratio - coverage ratio of average daily cash payments(Table 10 p. 198).
The point of such a calculation is to determine how many “days of payments” cover the funds available to the enterprise.
The first step of the calculation is to determine the amount of average daily payments made by the organization. The source of information on the amount of average daily payments can be the statement of financial results (form N2), or more precisely, the sum of the values for the positions of this report “Cost of sales of products”, “Commercial expenses”, “Administrative expenses”. Non-cash payments such as depreciation must be subtracted from this amount. This recommendation is given in foreign literature. However, it is difficult to directly use it in relation to Russian enterprises.
Firstly, Russian enterprises often have significant amounts of stocks of materials and finished products in warehouses. In this regard, the amount of real payments associated with the implementation of the production process may be much greater than the cost of goods sold reflected in form N2. Another feature of Russian business that must be taken into account in calculations is barter transactions, in which part of the resources used in the production process are paid not with money, but with the products of the enterprise.
Thus, to determine the average daily cash outflows, it is possible to use information on the cost of goods sold (less depreciation), but taking into account changes in Balance Sheet items " Industrial stocks", "Work in progress" and "Finished products", taking into account tax payments for the period and minus material resources received through barter.
It is correct to take into account both positive (increase) and negative (reduction) increases in inventories, work in progress and finished goods.
Thus, the calculation of average daily payments is carried out according to the formula:
The source of information on cost of goods sold is the income statement. The source of information about the magnitude of increases in inventories, work in progress, and finished products is the aggregated balance sheet.
Note that to carry out the calculation it is necessary that
- information in Form No. 2 was presented for the period (not on an accrual basis);
- all indicators used in the calculations related to the same time period.
For a more accurate calculation of average daily payments, in addition to information on the costs of production and sales of products, you can take into account tax payments for the period, expenses for maintaining the social sector and other costs of the period. However, it is necessary to observe the principle of reasonable sufficiency - in calculations it is recommended to take into account only payments that are “significant for the current account”. Thus, enterprises can create individual modifications to the formula for calculating average daily payments.
For example, depreciation charges may not be excluded from the cost of products sold. In this way, you can compensate for part of other payments that need to be included in the calculation (for example, taxes or social payments).
The total amount of taxes paid for the period is not directly highlighted in form No. 2, so it is possible to limit oneself to income tax (highlighted in form No. 2).
If the share of offsets and barter in the enterprise’s calculations is small, you can ignore the adjusting factors of formula 19.1, designated as (1-share of barter).
If the share of barter (mutual offsets) in the organization’s calculations is small and other cash costs are comparable to the amount of depreciation accrued for the period, the calculation of cash costs for the period can be carried out using the formula
To determine the amount of average daily payments, it is necessary to divide the total cash payments for the period by the duration of the analyzed period in days (Int).
To determine how many “days of payments” are covered by the company’s cash, it is necessary to divide the cash balance on the Balance Sheet by the amount of average daily payments.
When calculating the coverage ratio of average daily cash payments, a fair remark may arise: the cash balance on the Balance Sheet may not accurately characterize the amount of cash that the company had during the analyzed period.
For example, shortly before the reporting date (the date reflected in the Balance Sheet), large payments could be made, and therefore the cash balance on the Balance Sheet is insignificant. The opposite situation is possible: during the analyzed period, the company’s cash balance was insufficient, but shortly before the reporting date the customer repaid the debt, and therefore the amount of money in the company’s current account increased.
Note that both the classic indicator of absolute liquidity and liquidity in payment days are based on the data reflected in the Balance Sheet. In this regard, the error of both coefficients is the same.
The resulting liquidity values in payment days are more informative than liquidity ratios and allow us to determine acceptable absolute liquidity values for an enterprise.
For example, the head of an enterprise that has stable terms of settlements with suppliers and customers, producing serial products, believes that the coverage ratio of average daily cash payments of 10-15 days is quite acceptable. That is, a cash balance covering 15 days of average payments is considered acceptable. In this case, the absolute liquidity ratio can be 0.08, that is, be lower than the value recommended in Western practice financial analysis.
2.6.2. Calculation of liquidity indicators acceptable for a given enterprise (organization)
In Western practice, to assess the liquidity of an enterprise (organization), a comparative method is used, in which the calculated values of the coefficients are compared with the industry average. Despite the fact that the optimal values of liquidity ratios for a particular industry and a particular enterprise are unique, the following values are often used as a guideline:
- for the total liquidity ratio - more than 2,
- for the absolute liquidity ratio - 0.2 - 0.3,
- for the intermediate liquidity ratio - 0.9 - 1.0.
In Russia, there is not yet an updated statistical database of optimal values of liquidity indicators for enterprises (organizations) in various fields of activity. Therefore in In Russian practice, when assessing liquidity, it is recommended
- pay attention to the dynamics of changes in coefficients;
- determine the values of the coefficients acceptable (optimal) for a given specific enterprise
It is known that the ability of an organization to meet current obligations depends on two fundamental points:
- terms of mutual settlements with suppliers and buyers;
- degree of liquidity of current assets (property structure)
The conditions listed above are basic when calculating the total liquidity indicator acceptable for a given specific enterprise.
The calculation of the acceptable value of total liquidity is based on the following rule- to ensure an acceptable level of liquidity of the organization, it is necessary that the least liquid current assets and part of the current payments to suppliers that are not covered by proceeds from buyers are financed from its own capital. Thus, the first step of the calculation is to determine the amount of own funds necessary to ensure uninterrupted payments to suppliers, as well as the allocation of the least liquid part of the organization’s current assets.
The amount of the least liquid part of current assets and own funds necessary to cover current payments to suppliers represents the total amount of own funds that must be invested in the organization's current assets to ensure an acceptable level of liquidity. In other words, this is the amount of current assets that must be financed from own funds.
Knowing the actual value of the organization's current assets and the amount of current assets that must be financed from its own funds, it is possible to determine the permissible amount of borrowed sources of financing current assets - that is, the permissible amount of current liabilities.
The total liquidity ratio acceptable for a given enterprise is defined as the ratio of the actual value of current assets to the estimated acceptable value of current liabilities.
Can you suggest two calculation options indicator of overall liquidity acceptable for a particular enterprise. Conventionally, they can be called "soft" and "hard". The difference between the options lies in the differences in the description of the organization’s payment terms with suppliers and customers. Using the “soft” and “hard” options, it is possible to determine, respectively, the minimum and maximum limits for changes in the total liquidity indicator acceptable for a given organization in the current operating conditions.
"Soft" option
The “soft” option involves regular payment of invoices by buyers and regular payment of invoices by suppliers. In this case, the minimum acceptable value of the total liquidity indicator is determined (Table G p. 80, Table 11 p. 199).
In this option, the amount of own funds necessary to ensure uninterrupted payments to suppliers is determined on the basis of absolute values and turnover periods of receipts (customer advances, accounts receivable) and payments (advances to suppliers, accounts payable).
Let us dwell in more detail on line 10 “Receipts available by the date of repayment of accounts payable and payment of advances.” This value is defined as the product of absolute values according to the aggregated balance sheet (Accounts receivable + Advances from customers) by the fraction (Turnover period of accounts payable + Turnover period of advances to suppliers)/(Turnover period of receivables + Turnover period of customer advances). The fraction allows you to determine the share of revenues available by the deadline for fulfilling obligations to suppliers.
In the previous edition of this book, a formula of a slightly different type was proposed for line 10 of table G, namely:
The calculation logic and data used are the same in both options. The calculation results obtained using both formulas will also be the same, but under one condition: if the enterprise has advances to suppliers and accounts payable (accordingly, the presence of the turnover periods of the two listed elements in the formula, lines 2 and 3).
For example, if the company does not have advances to suppliers (line 3=0) in the formula given on this page, the second term will be equal to 0. Thus, advances from buyers were excluded from consideration, which is not correct: advances from buyers in this case, as well as accounts receivable, will be used to pay off accounts payable. It was necessary to make changes to the formula, which was not always done. A similar situation arose in the absence of accounts payable.
The nuances listed above led to the need to transform the formula to the form presented in line 10 on page 81. This formula allows you to make correct calculations in the presence or absence of any of the calculation elements (in particular, the updated formula automatically and correctly takes into account the situation with the absence of advances to suppliers or accounts payable).
Let us note again that if all the elements of mutual payments of the enterprise with buyers and suppliers are present, the results of calculations using the previous (p. 82) and modified (p. 81, line 10) formulas will be equal. "Hard" option
The “hard” option involves discrete payment of invoices by buyers and discrete payment of invoices by suppliers. It is assumed that bills are paid in one lump sum in the entire amount over a period equal to the turnover period of the debt in question. In this case, the maximum permissible value of the total liquidity indicator is determined (Table H, Table 12, p. 200).
In this option, the amount of own funds necessary to ensure uninterrupted payments to suppliers is determined based on the difference in the periods of receipts (advances from buyers, accounts receivable) and payments (advances to suppliers, accounts payable) and the amount of average daily costs.
The calculated acceptable values of the total liquidity ratio must be compared with its actual values, on the basis of which a conclusion can be drawn about the level of the organization’s overall liquidity.
When calculating the optimal liquidity indicator for a particular enterprise, it is necessary to individually decide the question: what to include in the least liquid part of current assets (for example, whether to take into account all inventories or exclude part of them as highly liquid). Whether to account for finished goods or part of them as the least liquid assets.
Acceptable values of the total liquidity indicator determined by the “soft” and “hard” options may differ from each other. In this case, the one determined under the terms of mutual settlements that are closest to the enterprise is chosen as an indicative value.
If the payment of invoices to suppliers and the receipt of funds from buyers are quite regular, the value of the total liquidity ratio determined using the “soft” option is selected as acceptable (acceptable). In the opposite case, the value of the total liquidity ratio determined using the “hard” option is chosen as a reference point.
Gradually, the organization will be able to accumulate a statistical database of acceptable (optimal) values of the total liquidity ratio depending on operating conditions.
When calculating the total liquidity indicator acceptable for a given enterprise, it is determined important characteristics of the state of the enterprise:
- required (allowable) amount of net working capital;
- ratio of receipts from buyers and payments to suppliers
The line “Total required own funds” of tables G, H (tables 11, 12) reflects the amount of own sources of financing that must be invested in current assets. The amount of equity capital invested in the current (current) assets of an enterprise is nothing more than net working capital.
By comparing the calculated values of the net working capital required by the enterprise with the actual values of NWO, one can judge the sufficiency (inadequacy) of the level of the organization's working capital.
The line “Own funds necessary to cover current payments to suppliers” can be considered as an indicator characterizing terms of settlements of the organization with buyers and suppliers.
Selecting a zero value for this line indicates that revenues cover payments, and no additional sources of financing are required to ensure uninterrupted payments. Such settlement conditions are favorable for the organization. The greater the amount of own funds that must be invested to ensure uninterrupted payments, the less favorable the conditions for settlements with buyers and suppliers are for the organization.
Levers for optimizing an organization’s liquidity can be:
- Increasing own funds.
An increase in the share of own sources of financing can be achieved by increasing the profitability of the organization's activities and further directing net profit to increase own funds. - Improving working capital management;
Working capital optimization reserves are determined at the stage of turnover analysis and may consist of reducing the turnover periods of elements of current assets and (or) increasing the turnover periods of elements of current liabilities. Of course, an increase in the turnover periods of elements of current liabilities does not mean a violation of the terms of contracts with suppliers and settlements with budgets (it does not mean the creation of overdue debts to suppliers, the budget, or personnel). - Optimization of investment policy
Optimization of investment policy means bringing the scale of capital investments into line with the real financial capabilities of the organization. - Optimization financial policy
Optimization of financial policy means, in particular, a refusal to finance capital investments through short-term lending. Attracting long-term financing. - Sale of part of the permanent assets not used in the production process.
Liquidity ratiocharacterizes the ability of a legal entity to pay its debts with its own property. Let's look at what options for calculating the liquidity ratio exist in our article.
Enterprise liquidity: from absolute to total
The concept of liquidity (i.e., the ability to be sold) is applicable to the property that constitutes the current assets of an enterprise. It is considered in connection with a quantitative assessment of the possibility of repaying the short-term debts of the enterprise.
Based on the speed of sale, property forming current assets is divided into liquidated assets:
- very quickly (money and short-term financial investments);
- quickly enough (short-term accounts receivable);
- relatively short-lived (reserves).
In accordance with this gradation, 3 main liquidity ratios are calculated:
- absolute (based on the value of the property being sold very quickly);
- average (from the amount of property sold very quickly and fairly quickly);
- total (of the total value of all current assets).
The meaning of these ratios is to compare the value of available property and the amount of short-term debts existing on the same date. That is, each liquidity ratio shows what part of short-term liabilities can be repaid through the sale of each set of types of property.
Since the type of property is linked to the speed of its sale, the calculated coefficients give an idea of the company’s ability to pay off debts in a time-bound manner. And this, in turn, allows us to draw conclusions about the current solvency of the enterprise, analyze its dynamics in retrospect and make forecasts for the future.
How to calculate liquidity ratios
The procedure for calculating liquidity ratios is subject to 1 algorithm: each of them represents the ratio of the value of the corresponding property to the amount of short-term debts. The data for calculation is taken from the sections of the balance sheet.
The value of short-term debts can be determined as a result of Section V, provided that the values of the data for deferred income and estimated liabilities, which are not actually debt, are immaterial. Otherwise, as the denominator liquidity ratios It is better to use the amount of liabilities for borrowed funds and all (ordinary and other) debts to creditors taken along the lines of this section.
In relation to the 2nd option, the denominator of the coefficient formula will look like this:
KLabs = (DenSr + KrFinVl) / (KrKr + KrKredZad + PrObligation),
KLsr = (DenSr + KrFinVl + KrDebZad) / (KrKr + KrKredZad + ProObligation),
CLtotal = OborAct / (KrKred + KrKredAsad + ProObligation),
The following ratio is often used as a formula for the total liquidity ratio:
CLtotal = OborAkt / KrObliaz,
OborAct - the total value of the value of current assets;
KrOliaz - the general value of the amount of short-term liabilities.
Liquidity ratios: balance sheet formulas
If we express the formulas for liquidity ratios through the line numbers of the current balance sheet, they will take the following form:
- absolute liquidity ratio:
KLabs = (1250 + 1240) / (1510 + 1520 + 1550),
- urgent liquidity ratio:
KLsr = (1250 + 1240 + 1230) / (1510 + 1520 + 1550),
- total liquidity ratio:
CLtotal = 1200 / (1510 + 1520 + 1550),
where: KLabs - absolute liquidity ratio;
KLsr—term liquidity ratio;
KLtot - total liquidity ratio;
DenSr - amount of funds;
KrFinVl - the amount of short-term financial investments;
KrDebZad - short-term debts of debtors;
OborAct - the total amount of current assets;
KrKred - the amount of short-term borrowed funds;
KrKedrZad - short-term debts to creditors;
Obligation - the amount of other short-term debts.
And the 2nd calculation of the total liquidity ratio will look like this:
KLtotal = 1200 / 1500,
where: KLtot - total liquidity ratio;
1200 - the total value of current assets;
1500 is the total value of short-term liabilities.
What do the standard values of the coefficients show?
The following are considered the standard values of the considered coefficients:
- For absolute liquidity - in the range of 0.2-0.5, which indicates the ability to very quickly repay from 20 to 50% of short-term debts.
- For urgent liquidity - in the range of 0.7-1, i.e. when you can quickly close from 70 to 100% of short-term debts.
- For overall liquidity, it is equal to or greater (but not much) 1, i.e. current assets must cover the amount of short-term liabilities. A coefficient value significantly exceeding 1 indicates ineffective use of working capital.
The insolvency of a company is often a sure sign of its future bankruptcy. Failure to pay invoices issued by counterparties on time leads to lawsuits, which can be very difficult to pay due to the loss of commercial reputation. Therefore, for the successful functioning of an enterprise, timely financial analysis is necessary. Its basis is the assessment of the company's solvency using a number of indicators. These include, in particular, the total liquidity ratio.
The calculation of this indicator allows you to understand whether the company in question will be able to pay the emerging claims of its creditors on time. The ratio of current assets to current liabilities is the total liquidity ratio, the formula of which is the subject of this article.
The essence of the concept
First, let's understand what liquidity is. This economic term refers to the ability of one type of asset to be converted into another or to be sold at a price close to the market price. Money is the most liquid value because it can be exchanged for almost anything. Of fundamental importance for assessing the solvency of a company is the conversion rate. The larger it is, the more liquid its assets are.
Classification of balance sheet items
Experts distinguish three groups of assets owned by companies: high-, low- and illiquid. At the same time, you need to understand that being classified as the latter does not mean that this value cannot be sold in principle, but only that its price when sold on the market will be much less than the nominal value. If it cannot be converted into its cash equivalent under any circumstances, then it cannot be considered an asset at all and placed on the balance sheet of the enterprise, much less taken into account when the total liquidity ratio or any other indicator of solvency is calculated.
Main groups
Let's arrange the main balance sheet items in descending order of their ability to quickly be converted into money:
- funds in current bank accounts and in the cash register of the enterprise;
- state securities and bank promissory notes;
- short-term accounts receivable;
- corporate shares and bills;
- equipment, structures, buildings;
- objects of unfinished construction.
The more highly liquid assets a company has, the easier it will be for it to pay off unexpected obligations. It is the assessment of their quality that financial analysis deals with.
Main indicators
There are three main indicators for assessing the solvency of a company - absolute, quick and current liquidity ratios. The first represents the share of the most convertible assets in the volume of current liabilities. Its normal value is a figure greater than 0.2. This means that the company can pay off 20% of its short-term debt with its most quickly convertible assets. If this indicator is less than 0.2, then this is a reason to think about increasing the funds in your bank account and cash balances.
The quick (quick) liquidity ratio is the quotient of current funds minus inventories divided by short-term liabilities. The norm is from 0.8 to 1. A large number may indicate an irrational distribution of resources. The current (total) liquidity ratio is an indicator of financial analysis, which represents the ratio of current assets and current liabilities. Its normal value ranges from 1.5 to 3.
Total liquidity ratio: formula
For calculation purposes, we will divide all assets and liabilities into groups. Let us denote the assets by the letters A1, A2, A3, A4, where the number indicates the liquidity of the value in question. Let’s combine passives into groups in the same way. P1, P2, P3 and P4 are short-, medium- and long-term obligations, as well as permanent ones. An enterprise is considered liquid if the assets of each group exceed the corresponding liabilities. The total liquidity ratio (K) will be equal to the ratio of the sum of all values, except those that are difficult to sell, and short- and medium-term obligations, or K = (A1+A2+A3) / (P1+P2). If we substitute the values from financial statements, then we can assess the solvency of the company. If we consider the formula in terms accounting analysis, then the total liquidity ratio represents the share of current assets (CA) excluding debt on statutory contributions (ZU) in the volume of short-term debt (KZ). Thus, K = (OA - ZU) / KZ.
Practical value of the indicator
Calculating the total liquidity ratio allows you to understand whether the company is able to pay off its short-term debt using current assets. A value from 1.5 to 2.5 is considered normal. If the overall balance sheet liquidity ratio calculated using the above method is less than 1, this means that the company can declare insolvency at any time and stop paying its current bills. The next stage may be bankruptcy, because it is impossible to solve problems that are so advanced without significant financial investments. If the value of the coefficient is greater than 3, then this indicates that capital is being used irrationally. Solving this problem is very simple - you need to invest your available funds in less liquid but more profitable assets.
Liquidity management
Effective management includes not only monitoring the work of employees, but also monitoring existing property and obligations. There are two main ways to manage liquidity risks: control over the volume of assets and liabilities. Management in this area is based on the so-called GAP analysis, which allows you to assess the absolute and relative gap between available and borrowed funds. It is aimed at maintaining a conditionally safe volume of assets that will make it possible to respond to unexpected obligations to counterparties.
Similarly, any person saves an amount in case of unforeseen circumstances. Proper liquidity management allows an enterprise not only to survive during an economic crisis, but also to buy resources more cheaply when unexpected profitable offers arise.
Increased solvency
If the total liquidity (coverage) ratio is less than 0.8, then any crisis event can bring the enterprise to the brink of bankruptcy. There are several ways to prevent such a sad scenario from happening:
- Decrease accounts receivable.
- Increase the profitability of the enterprise.
- Increase the volume of your own current assets and reduce the amount of inventories.
- Issue securities to additionally attract free cash resources.
- Reduce the volume of short-term liabilities.
Optimizing the structure of assets and liabilities is a rather complex task that requires drawing up a competent and thoughtful scheme. If the owner of the enterprise does not understand this, then it is better to invite a highly qualified specialist. The costs of hiring him will pay off many times over in the future, since the correct structure of own and borrowed funds is the basis for the prosperity of any commercial organization.
Liquidity formula is calculated by the ratio of highly liquid assets, quickly realizable assets and slowly convertible and most urgent liabilities and medium-term liabilities.
There are 3 types of liquidity ratios:
- Current liquidity,
- Quick (urgent) liquidity,
- Absolute liquidity.
The very concept of liquidity means the ability of an enterprise’s assets to quickly transform into cash that can be used:
- Pay wages,
- Payment of taxes and other obligatory payments to budgets,
- Payment of dividends,
- Payment of debts to creditors, counterparties, etc.
Liquidity is often equated to solvency, that is, the ability of an enterprise to sell its own assets at a market price. The term liquidity itself comes from the word liquidate (sell or realize). Liquidity is a basic concept of financial analysis that reflects the rate at which a company’s assets are converted into money.
Current Liquidity Formula
Current ratio is one of the three main criteria characterizing the liquidity of an enterprise.
Current liquidity is a key indicator of the financial condition of any enterprise; it must be constantly monitored.
An increase in the ratio makes an enterprise more investment attractive for investors and creditors, which gives it more additional leverage and financial resources while increasing market value, including profitability.
There are several types of company assets and liabilities that make up the liquidity formula.
Asset classification:
- A1 – Highly liquid assets (line 1250),
- A2 – Quickly realizable assets (line 1230),
- A3 - Slowly convertible assets (p. 1220).
Liabilities are classified as follows:
- P1 - The most urgent liabilities (p. 1520),
- P2 - Medium-term liabilities (p. 1510).
Taking into account this classification, the liquidity formula (current) has the following form:
Go to current =(A1+A2+A3)/(P1+P2)
If we take into account the balance lines, the formula will take the following form:
Go to current =page 1200 / (p.1510+p.1520+p.1550)
Formula for quick (urgent) liquidity
The quick liquidity ratio is an indicator that characterizes the solvency of a company in the medium term. Using this indicator, you can determine whether the company will be able to pay off short-term obligations if it uses liquid assets.
Liquidity (quick) formula in general form:
K fast = (DS + KV + KZ) / TO
CF – the amount of short-term financial investments,
KZ – short-term accounts receivable,
TO – the amount of current liabilities.
Another version of the liquidity formula:
K fast = OA-Z / TO
Here OA is the amount of current assets,
Z – reserves,
TO – current liabilities.
Absolute liquidity formula
The absolute liquidity ratio shows the share of short-term debt that can be repaid using the company's most salable assets in the shortest possible time.
The (absolute) liquidity formula is determined by the ratio of the amount of easily salable property to the amount of short-term debt:
To abs. = (DS + KFV) / KO
Here DS is the amount of money,
KFV – short-term financial investments,
KO – short-term liabilities.
Examples of problem solving
EXAMPLE 1
| Exercise | Determine the current liquidity ratio of an enterprise if it has the following indicators for the past period in its balance sheet: Amount of funds – 50 thousand rubles, The amount of short-term financial investments is 32 thousand rubles, Accounts receivable – 126 thousand rubles, Debt of creditors – 115 thousand rubles, Production reserves – 158 thousand rubles, Short-term loans in the amount of 98 thousand rubles. |
| Solution | The liquidity formula for solving this problem is as follows: Current =(A1+A2+A3)/(P1+P2) Go to current =(50+32+126+158)/(115+98)=366/213=1.72 Conclusion. Over the past period, the company worked with a current ratio of more than one. This means that there is no real threat of bankruptcy. A coefficient of 1.72 means that by this number of times, current assets cover the amount of short-term liabilities. That is, this company can be considered solvent. |
| Answer | Go to current =1.72 |
EXAMPLE 2
| Exercise | Calculate the liquidity ratio (absolute) at the beginning and end of the year, making a conclusion about the state of the company. The amount of easily realizable property Beginning of the year - 312 thousand rubles, End of the year - 398 thousand rubles, Short-term debt Beginning of the year - 645 thousand rubles, End of the year – 689 thousand rubles. |
| Solution | Absolute liquidity formula: To abs. = Value of easily realizable property/Short-term debt To abs. (beginning of year)=312/645=0.48 To abs. (end of year)= 398/689=0.58 Conclusion. The normal value of the absolute liquidity ratio is from 0.2 to 0.5. We see that its value has increased over the year. An increased value of the indicator may indicate a higher solvency of the company, but it may also indicate unjustified costs when using highly liquid assets. |
| Answer | To abs. (beginning of the year) = 0.48, K abs. (end of year)=0.58 |
– this is the ratio of currently available working capital and known debt obligations, which reflects the solvency of organizations (manufacturing enterprises, banks, etc.). The overall liquidity indicator is formed from two categories: asset turnover and the amount of liabilities.
The asset turnover indicator determines the effectiveness of financial and material resources organizations. It is considered in conjunction with accounts receivable and accounts payable. In fact, such debt forms the amount of the organization’s obligations to debtors and creditors. The balance of indicators between the turnover of assets and the amount of liabilities forms the amount of total liquidity of a particular organization.
The concept of total liquidity
Liquidity- an economic parameter characterizing the ability of assets to be converted into cash equivalent (cash, bills, shares, etc.). The liquidity indicator is classified by degree - there are: illiquid, low-liquidity and highly liquid assets owned by a particular organization.
Based on this, liquidity is a relative concept, characterized by the speed with which the cash equivalent is acquired in the balance sheet.
The degrees of liquidity in the Russian balance sheet are structured into the following groups:
- Assets of group A1 (maximum liquid) - the totality of the organization’s funds, as well as short-term financial investments.
- Assets of group A2 (average realizable) are determined by short-term receivables.
- Assets of group A3 (slowly realized) - include the organization’s resources, as well as receivables over 12 months.
- Assets of group A4 (difficult to sell) – a set of non-current assets.
The overall liquidity of an organization is not considered without a set of indicators of assets and liabilities (liabilities). Liabilities are also divided into several groups of liabilities (depending on the expected repayment period):
- Liabilities of group 1 (P1) – urgent obligations of the organization to borrowers.
- Liabilities of group 2 (P2) – medium-term, including short-term loans, etc.
- Obligations of group 3 (P3) – organizations.
- Obligations of group 4 (P4) – permanent obligations, including organizations.
Specifics of assessing general liquidity
Overall liquidity is the main characteristic of an organization's solvency. Liquid assets must equal or exceed all known current liabilities. In other words, the organization must own financial resources, as well as assets from which funds can be quickly and reliably drawn to cover active expenses.
Indicators assessing liquidity are entered into the annual accounting report. In this case, information for assessing the amount of total liquidity is contained in the balance sheet (Form No. 1), as well as in the report in Form No. 2.
Total liquidity is calculated using the following formula:
where, A1/A2/A3 – liquid assets (by groups).
P1/P2/P3 – liabilities (by groups).
and efficiency):
- The amount of liquid assets exceeds the amount of liabilities - an option that indicates a tendency to increase the budgetary mass and the full solvency of the organization.
- The amount of assets and the amount of liabilities are equal - an option indicating solvency, in which financial resources can only cover (the organization does not have free funds for development).
- The amount of liquid assets is less than the amount of liabilities - an option in which financial resources do not cover expenses, forcing the use of credit loans or reducing production.
Conclusion
Total liquidity– an indicator that reflects the profitability and efficiency of an organization. When assessing overall liquidity, the growth or loss potential of a company is revealed, so it serves as one of the grounds for attracting investors. In addition, taking into account indicators of general liquidity allows you to optimize the ratio of the volume of assets to debt obligations of a particular organization.
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