The liquidity ratio allows you to assess the organization's ability to pay off its obligations using current assets transformed into cash.

Liquidity and liquidity ratio

Liquidity refers to the ability of an asset to be transformed into money at a greater or lesser speed. The faster an asset can be sold, the more liquid it is considered. Cash is considered the most liquid; industrial equipment and buildings are considered the most difficult to sell. In relation to an organization, its liquidity is the ability to pay off its obligations on time, selling (if necessary) its existing assets.

To reflect this ability in numerical terms, the liquidity ratio is used. It means a group of coefficients, each of which evaluates a certain aspect of the organization’s activities, and together they give an overall holistic picture of its effectiveness. The essence of the liquidity ratio is to compare the amount of debts and current assets of the organization, and assess their volume necessary to repay the debt.

To calculate the ratio, the organization’s balance sheet data is used. Moreover, it would be more correct to make a calculation not for the current moment, but to trace the dynamics over at least the last two to three years

Calculation of liquidity ratio

The liquidity ratio includes the following ratios:

Total liquidity (coverage), which reflects the organization’s ability to pay off its short-term debts:

Quantity = Working capital / Current liabilities

The optimal value of Kol is 1.5-2.5. If it is below 1.5, this indicates that the organization is experiencing difficulties in repaying current debts, because there are not enough cash assets or it is not always possible to quickly turn them into money to pay obligations. For the manager, this is a signal that it is necessary to find an opportunity to reduce accounts payable to counterparties. But a value greater than optimal is also not a positive signal - this means that the organization has resources at its disposal that are not used or are not used effectively enough. It may be worth investing part of the funds in long-term projects for a period of more than 1 year.

Urgent or quick liquidity, reflecting what part of the obligations the organization is able to pay off with money, quickly collecting current debts or selling short-term securities:

Kbl = (Short-term investments + Cash + Short-term receivables) / Current liabilities

The optimal value is 0.8 - it means that the organization can pay off 80% of its debts promptly, even if they are presented for collection all at once. To do this, it will not have to put up for auction either premises or equipment - it will be enough to use quick-liquid assets. The higher the indicator, the better (to a certain extent), because this means that there are prospects for future income (from collected debts or securities), and not just money in accounts. Too high a value (more than 3) indicates irrational use of assets - either there are too many accounts receivable, or the available money is not working, which would be worth investing in long-term financial instruments. KBL less than 0.7 signals the need to increase working capital, possibly by obtaining a long-term loan. But such a value may scare away potential investors, as it indicates that the organization does not have quick- and medium-liquid assets.

Absolute liquidity, which allows you to determine short-term obligations, the debt for which the organization is able to repay promptly.

Kab = (Cash + Short-term investments) / Current liabilities

The normal value of Kab is greater than 0.2. A low indicator indicates that the organization cannot immediately pay debts with cash or money in accounts, even if it quickly sells its existing securities. An indicator above 0.5 indicates the presence of money lying uselessly in the company’s accounts, which should be invested in long-term financial instruments.

It is not always possible to understand just how well a company is doing with a quick glance at the balance sheet. Liquidity ratios are an excellent hint for a manager, which indicates the direction of further work to improve the efficiency of the organization.

The financial stability of an enterprise is assessed by several indicators. One of the key ones is the current liquidity ratio. This is the ratio of current assets to current liabilities, indicating whether the company is turning over funds quickly. It is optimal that its value is in the range of 1-2.5.

 

The financial stability of an enterprise can be assessed by the current liquidity ratio. This is a demonstration of solvency; the indicator indicates whether the company is able to meet short-term obligations.

Why count?

The indicator is not needed when maintaining accounting, tax or management accounting. It is necessary to calculate it to confirm solvency to investors or banks. In some cases, it will come in handy when negotiating with suppliers.

Banks use the indicator to assess the solvency of the enterprise and make decisions on issuing loans.

Investors need it to assess the return on investment and the timing of profit.

However, small businesses need more indicators for self-testing:

Formula for calculation

Several formulas are used to calculate the current ratio. The whole point comes down to one thing: finding the ratio of current assets to short-term liabilities. Data is taken from the balance sheet:

Coeff. tl = Ao / Ok, where

JSC - current assets (result of section II of the balance sheet);

Ok - short-term liabilities (total of section V of the balance sheet).

Ao is the sum of three types of assets:

• fast-moving (cash in hand, funds in a current account, investments in securities);
• quickly sold (shipped goods, funds on deposits, debts of debtors for up to 12 months);
• the implementation of which takes time (VAT, accounts receivable with payments starting from a year).

Ok - the amount of short-term liabilities:

• debt to suppliers;
• wage arrears;
• tax debt;
• short-term loans and borrowings.

A more detailed calculation using the example of OJSC Gazprom is shown in the video:

Conclusion: The company is financially stable.

To get the full picture, let’s compare it with another company.

Conclusion: The liquidity ratio is within normal limits, however, given that this is an industrial enterprise, 1.88 indicates insufficient liquidity. The company is less stable compared to the previous example.

Possible values

A coefficient of 1 to 2.5 is considered normal. If it is within these limits, then the company spends money rationally and can be liable for its obligations.

However, the lower and upper thresholds depend on the field of activity. For trading companies, 1 is close to the norm, since they have a lot of short-term loans. However, for industry this value is critical, because They have a large amount of work in progress and a lot of inventory.

Average critical values ​​for most enterprises:

• less than 1 - the company cannot pay bills;
• more than 2.5 - the company is spending money irrationally.

Dynamics of changes in the coefficient for the enterprise JSC Transneft:

Too high an indicator also indicates a long turnover period of funds.

The excess of current assets over liabilities indicates the presence of inventories. And the company can send them to compensate for losses. The opposite situation indicates problems with liquidity and inability to meet obligations.

How to increase the coefficient?

There are 2 ways to do this:

• reduce the amount of accounts payable;
• increase current assets.

The coefficient may be needed to calculate other company performance indicators.

Accumulating information about the property and capital of a company in the balance sheet is not a whim of legislators, but a very important component in the life and development of any company. After all, according to the information contained in this report, they determine the situation in the enterprise at a certain moment, the possibilities of its growth, liquidation, re-profiling of production, etc. One of the main indicators is the liquidity of the balance sheet, which assesses the position of the company.

Balance sheet liquidity: what is it?

This term refers to the degree to which obligations are repaid using the assets available in the company. The period of their conversion into money corresponds to the period of debt coverage, and since the property has a different degree of turnover, the solvency of the company is considered according to the liquidity levels of different categories of balance sheet assets. The question of its definition is always relevant, i.e. the degree of liquidity is determined using certain algorithms, independent of the purpose of the analysis. They are the same for a rapidly developing entity, when it is necessary to determine a strategy for further development, and for liquidation measures, when the question arises about the amount of the company’s funds to pay off accumulated debts in the event of a predicted bankruptcy and making a decision on approving an interim liquidation balance sheet (a sample can be viewed here).

The main criterion of liquidity is the excess of the amount of current assets over short-term liabilities. And the higher it is, the more stable the company’s financial position can be.

Balance sheet liquidity assessment

To analyze the solvency of a company, a distinction is made between balance sheet items:

• property according to the degree of liquidity - from quickly sold to hard to sell;
• liabilities - according to the urgency of their repayment.

Assets			Liabilities
		Balance line number			Balance line number
Most liquid			Most urgent
Quickly implemented			Short-term liabilities		1510 + 1540 + 1550
Slow to implement		1210 + 1220 + 1260	Long-term
Difficult to implement			Permanent

When assessing liquidity, the values ​​of each category of assets are compared with a similar group of sources. For example:

1. when A 1 > P 1, we can talk about a sufficient amount of funds in the company to repay the most urgent obligations as of the balance sheet date;
2. A 2 > P 2 means that the organization can become solvent very soon if the conditions for timely settlements with creditors and debtors are met;
3. A 3 > P 3 speaks of the upcoming possibility of increasing solvency during the period of average duration of funds turnover.

The fulfillment of the listed inequalities will lead to conditions when A 4 ≤ P 4, and this indicates compliance with the minimum acceptable level of stability of the company and the funds owned by the company.

Balance sheet liquidity analysis

• current liquidity, indicating the company’s ability to pay obligations in the near future for the analyzed period: if in this case A 1 + A 2 ≥ P 1 + P 2 is satisfied, then the company’s position is stable (A 4 ≤ P 4);
• prospective, i.e., predicted liquidity based on comparison of upcoming operations: if A 3 ≥ P 3, then A 4 ≤ P 4;
• insufficient level of forecast liquidity;
• balance sheet illiquidity: A 4 ≥ P 4.

Such an assessment is very approximate; a more detailed analysis of the liquidity of the balance sheet is carried out using calculations of special coefficients.

Liquidity ratio: balance sheet formula

Several coefficient values ​​are calculated. For example:

1. Current liquidity ratio, indicating the organization’s provision of funds to pay obligations throughout the year and is determined as follows:

K = (A 1 + A 2 + A 3) / (P 1 + P 2)

The norm is a value in the range from 1 to 2. Exceeding the level of 2 indicates irrationality in the distribution of funds, and a coefficient below 1 indicates a shortage;

2. The quick liquidity ratio establishes the share of debt collateral with liquid assets, excluding inventory and materials, and is calculated using the formula:

K = (A 1 + A 2) / (P 1 + P 2)

An indicator in the range of 0.7 - 1.5 is considered acceptable;

3. The absolute liquidity ratio is calculated if you need to find out what part of the debts to creditors the company can cover immediately:

K = A 1 / (P 1 + P 2)

This indicator characterizes the stable state of the company if it is not lower than the critical level of 0.2.

4. The total value of liquidity is calculated to determine a comprehensive assessment of the solvency of the enterprise.

K = (A 1 + 0.5 x A 2 + 0.3 x A 3) / (P 1 + 0.5 x P 2 + 0.3 x P 3)

The calculation of this value is used when assessing fluctuations in the financial situation of the company and is taken into account when the company selects a counterparty. A normal value is 1 or higher.

Current liquidity ratio (Ktl) - the ratio of the value of short-term assets to the value of short-term liabilities of an enterprise. It allows you to determine whether the company has enough to cover its current obligations in a timely manner, which is why its other name is the coverage ratio. The solvency of a company is assessed using Ctl. For calculation The formula for the current liquidity ratio is:

Ktl = KA/KO,Where CA- short-term assets (Total for section II, line 290 of the balance sheet); KO- short-term liabilities (Total according to section V, p. 690). Short-term assets are in current economic circulation and are used within one year (12 months). These include:

inventories (inventory in warehouses - products, goods, materials), shipped goods, animals for growing and fattening (for agricultural organizations), work in progress, etc.) expenses deferred part of long-term assets intended for the sale of “input” cash and their analogues (at the cash desk, on the current account) accounts receivable, including letters of credit (what is owed to us) financial investments and other short-term assets.

Current liabilities (liabilities) represent the company's debts within a year:

short-term part of long-term liabilities (which will be repaid in the current year) current accounts payable (we owe) the organization to: suppliers and contractors, wage workers, property owner (founders, participants) Internal Revenue Service for taxes and fees, to social insurance and security, and other creditors, as well as debts on lease payments and advances received. liabilities intended for sale; deferred income; reserves for future payments; other short-term liabilities.

Current ratio standards

By type of eco. activities of organizations for Belarus, the values ​​are indicated in the post. Council of Ministers of the Republic of Belarus No. 1672 dated December 12, 2011. “On determining the criteria for assessing the solvency of business entities.” The higher the CTL turned out to be, the higher the solvency of the enterprise. The minimum value is not lower than 1, so that there is at least enough working capital to pay off short-term obligations. A coefficient value of 2 or more is considered optimal. But it is necessary to take into account the specifics of different areas (for example, a manufacturing plant in industry will have a higher CTL than a grocery store, because the plant stores large stocks of products and materials in its warehouses, buyers pay for goods with a deferred payment - a large receivable arises A retail store stores relatively quickly renewed stocks of products that are paid for immediately, so the ratio for it will be lower. It would be correct to take into account industry specifics, which is what has been done in Belarus. For example, the standard current ratio for agriculture is 1.5, and for retail trade standard - 1.Ktl more than 3 often says that the asset structure is irrational, the reasons may be:

slow inventory turnover, unjustified increase in accounts receivable.

The current liquidity ratio shows the company's ability to pay off its short-term obligations using current assets. The higher this coefficient, the more firmly the company “stands on its feet.” Based on this indicator, we can talk about the solvency of the company.

The current liquidity ratio is important:

• For potential investors. When investing money in any enterprise, investors must calculate the possible profit from their investment.
• For banks. If a company takes out a loan from a bank, then the bank, accordingly, calculates all the risks and possible profits.
• For suppliers materials and raw materials.

A normal current ratio is considered to be between 1.5 and 2.5. If this indicator is less than 1, this means that the company is not able to pay its current bills. There is no talk of long-term commitments. If the coefficient is more than 2.5, this indicates an irrational use of capital and a slow turnover of funds.

How to calculate the current ratio

To calculate the current ratio there is a formula:

Ktl = Current assets of the enterprise / Current liabilities

In turn, the current assets of an enterprise can be represented in the form of another formula: ObAk = A1 + A2 + A3. If you look at the balance sheet, ObAk is the result of section II. Current liabilities are: KrOb = P1 + P2. In the balance sheet, this is the total of section V.

Accordingly, the current liquidity ratio can be calculated using the formula:

Ktl = (A1+A2+A3) / (P1+P2)

Ktl = Total for Section II / Total for Section V

Now you need to figure out what A1, A2, A3, P1 and P2 mean.

A1- assets that are the most liquid, that is, they have a quick “turnover”. Such assets include:

• cash in hand, funds in the company's current account (line 1250 of the balance sheet);
• investments in securities (short-term) (line 1240 of the balance sheet)

A2- quickly realizable assets. These are assets that are either already in cash or can be converted in the shortest possible time. Such assets include:

• debt of debtors, the maturity of which does not exceed 12 months (line 1230 of the balance sheet);
• funds on deposit in the bank;
• finished products in warehouse, and shipped goods.

A3- assets that require time to be realized. These include:

• Accounts receivable, payments for which are expected within a period exceeding 1 year from the reporting date;
• VAT on purchased assets (line 1220 of the balance sheet);
• The balance sheet item “deferred expenses” is not included in this group.

P1- the most urgent obligations of the company, that is, the obligations of the company, the repayment of which is expected in the very near future. These include:

• Debt to suppliers (balance sheet line 1520);
• Debt on current tax obligations;
• Debt to employees of the enterprise for wages

P2- liabilities of the company for the short-term period. These include:

• Various short-term loans and borrowings (balance sheet line 1510).

If the amount of a company's current assets exceeds the amount of its liabilities, this indicates that the company has a safety stock. Using this reserve, it can compensate for losses that may arise during the company's activities.

If short-term liabilities exceed or are equal to the amount of current assets, this indicates that the company cannot pay even current accounts necessary for the normal functioning of the company.

Ways to increase the coefficient

To increase the current liquidity ratio, there are the following ways:

• Reducing the amount of accounts payable. One of the ways to manage accounts payable is to restructure it. Its amount can be reduced by providing mutual services (that is, offset), or by writing off this debt as unclaimed.
• Increasing current assets.
• Simultaneous reduction of both current assets and creditors. This is the most optimal and realistic way to increase the current liquidity ratio.

The calculation of the current liquidity ratio occurs with a general analysis of the solvency of the enterprise.

The analysis is necessary to calculate other important indicators of the company’s solvency: restoration of solvency, loss of solvency.

Based on these calculations, we can talk about the solvency of a given company in its industry.