The standard value of the current ratio is. Liquidity ratio: balance sheet formula and regulatory value
The financial stability of the enterprise is assessed by several indicators. One of the key is the current ratio. This is the ratio of short-term assets to short-term liabilities, showing whether the company quickly wraps up funds. It is optimal that its value be in the range of 1-2.5.
The financial stability of the company allows you to evaluate the current ratio. This is a demonstration of solvency, the indicator says whether the company is able to meet short-term obligations.
Why count?
The indicator is not needed when conducting accounting, tax or management accounting. It is necessary to consider it to confirm solvency to investors or banks. In some cases, it will come in handy when negotiating with suppliers.
Banks on the indicator assess the solvency of the enterprise and decide on the issuance of loans.
Investors need it to assess the return on investment and the timing of profit.
However, a small business needs an indicator more for self-testing:
Formula for calculating
To calculate the current ratio, several formulas are used. The whole point boils down to one thing: the ratio of current assets to short-term liabilities is found. Data is taken from the balance sheet:
Coeff. tl \u003d Ao / Ok, where
Ao - current assets (total of section II of the balance sheet);
Ok - short-term liabilities (total of section V of the balance sheet).
Ao - the sum of three types of assets:
- quick-moving (cash on hand, funds in the current account, investments in securities);
- quickly sold (shipped goods, funds on deposits, debt of debtors for up to 12 months);
- for the implementation of which time is required (VAT, debt of debtors with payments of a year).
OK - the amount of current liabilities:
- debt to suppliers;
- wage arrears;
- tax arrears;
- short-term loans and borrowings.
A more detailed calculation on the example of OAO Gazprom is shown in the video:
Conclusion: The company is financially stable.
For a complete picture, compare it with another company.
Conclusion: The liquidity ratio is within the normal range, however, given that it is an industrial enterprise, 1.88 indicates insufficient liquidity. The company is less stable than the previous example.
Possible Values
A factor 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 obligations.
However, the lower and upper threshold depends on the field of activity. For trading companies, 1 is close to normal, as they have many short-term loans. However, for industry this value is critical, because they have a large volume of work in progress and a lot of stocks.
The average critical values \u200b\u200bfor most enterprises:
- less than 1 - the company cannot pay bills;
- more than 2.5 - the company is wasting money.
The dynamics of the coefficient for the company Transneft:
Too high an indicator also indicates a long term turnover of funds.
The excess of short-term assets over liabilities indicates the availability of stocks. And their company can send for damages. The reverse situation indicates liquidity problems and inability to meet obligations.
How to increase the coefficient?
There are 2 ways to do this:
- reduce accounts payable;
- increase current assets.
The coefficient may be needed to calculate other indicators of the company.
Current ratio. current ratio)represents a liquidity ratio that measures the ability of a firm to execute short-term loans using current assets. The current liquidity ratio is an important measure of liquidity, since short-term liabilities are repayable within the next 12 months.
This means that the company has a limited amount of time to raise funds (or sell assets) to pay off obligations. Current assets, such as cash, cash equivalents and marketable securities, can be easily converted into cash in the short term. Companies with a high volume of current assets are able to easily fulfill short-term obligations to creditors without the need to raise additional funds or sell assets.
Formula
Current ratio (current ratio) calculated by dividing the total current assets (current assets) by the total current liabilities of the company. This ratio can be expressed as a formula:
The formula consists of two components - current assets and current liabilities. Both components are recorded on the balance sheet of the company (balance sheet). The following are components of current assets and liabilities:
Examples of current assets:
Cash
Market Securities
Accounts receivable
Inventories
Prepaid costs
Examples of current liabilities:
Accounts payable
Customer advances
Current liabilities
Example 1
The coffee shop sells coffee making equipment to local restaurants. Bob, the owner of the company, seeks a loan from the bank to finance the construction of a new factory for the production of a new type of coffee machine. The bank asks for a Coffeeshop balance sheet to analyze Bob's credit quality. According to the balance sheet, current liabilities amount to$ 200 000 , current assets - only$ 60 000.
Bob's current liquidity ratio will be calculated as follows:
$60 000/$200 000 = 0.3
Therefore, that Bob only has enough funds to pay off 30% his current obligations. This shows that Coffeeshop is a highly loaned company and very risky. Banks would prefer a current ratio of at least 1 or 2 so that all current liabilities are covered by current assets. Because Coffeeshop’s ratio is so low, it is unlikely that he will receive approval for a loan.
Example 2
The following data was extracted from the financial statements of two companies - company A and company B.
Company A |
Company B |
|
Cash |
$65,000 |
$5,200 |
Accounts receivable |
$156,000 |
$20,800 |
Inventories |
$13,000 |
$13,000 |
Future expenses |
$221,000 |
$416,000 |
Current assets |
$455,000 |
$455,000 |
Current responsibility |
$227,500 |
$227,500 |
Current ratio |
2.00 |
2.00 |
Both company A and company B have the samecurrent ratio (2: 1). However, do both companies have the same ability to pay their short-term obligations or not?
The answer is no. Company B is likely to have difficulty repaying its short-term liabilities, since most of its current assets consist of inventory, which is not quickly converted into cash. Entity A is likely to easily repay current liabilities as necessary, since a significant portion of current assets consists of cash and receivables. Accounts receivable are very liquid (if the customers are reliable) and can be quickly converted into cash.
From this analysis it is clear that the analyst must not only correctly calculate the current ratio, but also analyze the composition of current assets.
Disadvantages current ratio
1. Different ratios in different periods of the year.
Some enterprises have different trading volumes in different seasons. Such companies may show a low ratio for several months of the year, and high in other months.
2. Change in inventory valuation method.
To compare the ratio of the two companies, it is necessary that both companies use the same method of estimating stocks. For example, a comparisoncurrent ratio two companies would be like comparing apples to oranges if one company uses the FIFO valuation method and the otherLIFO for stock assessment. Therefore, the analyst in this situation will not be able to compare the ratio of the two companies even in the same industry.
3. The coefficientcurrent ratio - an indicator of quantity, not quality.
Financial analytics is not an exact science., but rather art, because the quality of each individual asset is not taken into account when calculating this coefficient.
4. The possibility of manipulation.
The current liquidity ratio can be easily manipulated by an equal increase or equal decrease in current assets and current liabilities. For example, if the company's current assets are$ 30,000, and current liabilities -$ 10,000, the current ratio is 3: 1.
If current assets and current liabilities are reduced equally$ 1,000, the ratio will be increased to 3.22: 1.
To reduce the impact of the above restrictions, the current liquidity ratio is usually used in combination with other ratios, such as inventory turnover ratio, debt to equity ratio and etc. These indicators check the quality of current assets, and in conjunction withcurrent ratio provide a better idea of \u200b\u200bthe issuer's solvency.
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What are liquidity ratios? Description and definition of the concept
Liquidity ratios - these are financial ratios that are calculated on the basis of systematic reports of the enterprise (the company's balance sheet) in order to determine the company's ability to pay off current debts from current or current assets that are available.
Liquidity (lat. Liquidus overflowing, liquid) is an economic term that refers to the ability of assets to be sold quickly at a price that is set according to indicators as close to market as possible. In other words, liquid is monetized.
Values \u200b\u200b(or assets) are usually divided into illiquid, low and highly liquid. The size of the asset’s liquidity is determined based on how easily and quickly it can be exchanged taking into account its full value. The liquidity of the goods will be calculated in accordance with the speed of its sale at the nominal market price, excluding discounts and special offers.
For example, different assets of the same enterprise, which are reflected in the balance sheets, have different levels of liquidity (in descending order):
- Money on accounts and cash at the box office.
- Types of government securities and bank bills.
- Current receivables, loans issued, securities related to corporate property (shares of the company, which are quoted on exchanges, bills of exchange).
- Stock of goods and types of raw materials in warehouses.
- Equipment and machinery.
- Buildings and constructions.
- Unfinished construction.
The term liquidity, among other things, can be applied to banks, firms or enterprises, various types of securities, the market, etc.
Enterprise liquidity
The list of tasks of analysis of indicators for the financial condition of the enterprise includes the assessment of its solvency and liquidity.
In assessing liquidity, instruments called liquidity ratios help. Liquidity ratios are financial indicators that are calculated on the basis of reports regularly submitted by the company. This happens in order to determine whether the company is capable of paying off current debt from the current assets that it owns.
We combine a practical calculation of liquidity indicators with a modification to the company's balance sheet, which aims to adequately assess the liquidity of various types of assets. For example, part of the remaining goods may have zero liquidity; the balance of receivables - to have a maturity of a little more than a year; Promissory notes and loans issued by the company although formally refer to assets in circulation, but in fact they are funds that are transferred for use for a long period in order to finance related structures. These balance sheet components extend far beyond the list of assets in circulation and are not taken into account when calculating the liquidity ratio.
Asset liquidity can be divided into 4 practical groups:
- A1 - the most liquid assets;
- A2 - goods sold fairly quickly;
- A3 - assets whose implementation is rather slow;
- A4 - assets that are difficult to realize.
The distribution of assets takes place in order to determine the level of liquidity of the enterprise or the balance sheet. Based on this, the sources of finance are divided into 4 groups:
- P1 - the most urgent to fulfill obligations;
- P2 - short-term passive;
- P3 - long-term passive;
- P4 - constant liabilities.
The company is liquid, provided that A1\u003e \u003d P1, A2\u003e \u003d P2, A3\u003e \u003d P3, A4\u003e \u003d P4.
Based on the above groups, specialists calculate liquidity indicators.
Current liquidity
The current liquidity ratio (coverage ratio - from the English. Current ratio, CR) is a financial indicator that equals the ratio of the total volume of current (current) assets in relation to short-term liabilities (current liabilities). Data provides the balance sheet of a company or enterprise. It is calculated by the following formula:
Ktl \u003d (OA-ZU) / KO or K \u003d (A1 + A2 + A3) / (P1 + P2), where
Ktl is the current ratio;
OA - these are assets in circulation;
ЗУ - the debt of the founder on contributions to the contents of the authorized capital;
KO - list of current liabilities.
This ratio shows the ability of the enterprise to repay the current (short-term) liability taking into account only current assets. The higher the indicator, the more solvent the enterprise is. Given the level of liquidity of assets, it is logical to conclude that not all of them can be sold urgently. A normal indicator is one that is in the range of 1.5-2.5, depending on the industry specialization of the enterprise. If the ratio is below 1, this indicates a high level of financial risk, which is associated with the fact that the company is not able to pay bills with stability. If the indicator exceeds 3, this indicates the irrational structuring of capital.
Quick liquidity
The quick (quick) liquidity ratio (from the English Quick ratio, Acid test, QR) is a financial indicator that equals the ratio of highly liquid current assets to the list of short-term liabilities or current liabilities. The data are similarly provided by the balance sheet, as well as for current liquidity indicators, however, the list of inventories is not included in the assets, because if they are forced to sell, the losses from this will be maximum among all funds in circulation.
Quick ratio is calculated by the following formula:
Cbl \u003d (Current Assets - Inventories) / Current Liabilities, or
Kbl \u003d (Short-term receivables + Short-term financial investments + Cash) / (Short-term liabilities - deferred income - Reserves for future expenses), or
K \u003d (A1 + A2) / (P1 + P2)
This ratio shows how capable the company is of paying off current obligations in case of difficulties in the process of selling the goods.
Absolute liquidity
Absolute liquidity ratio (from the English Cash ratio) is a financial indicator that equals the ratio of money and short-term financial investments to current liabilities (or short-term liabilities). Similarly to current liquidity indicators, the report is taken from the balance sheet, however, only cash or funds that are equal to them are taken into account in the composition of assets. This coefficient is calculated by the formula:
Cal \u003d A1 / (P1 + P2)
Cal \u003d (Cash + short-term financial investments) / Current liabilities
Cal \u003d (Cash + short-term financial investments) / (Short-term liabilities - deferred income - Reserves for future expenses)
A coefficient indicator is considered normal if it is not lower than 0.2, that is, theoretically, there is a potential for repaying 20% \u200b\u200bof urgent obligations daily. It makes it clear which part of the short-term debt the company will be able to repay as soon as possible.
Market liquidity
A highly liquid market is a market in which transactions on the sale and purchase of goods rotating on the market are regularly concluded in sufficient volume, and therefore the difference in the prices of the purchase application (demand price) and sale (offer price) is small. Each individual transaction concluded in such a market usually does not affect the pricing policy of the goods.
In general, market liquidity is an indicator that the stock or foreign exchange market possesses, and which indicates the degree of saturation with the most liquid financial goods. Simply put, the liquidity of the market or stocks indicates how high the level of demand of the market or stock for participants or the level of financial turnover of the components of financial goods in the market. If the stock market is highly liquid, this means that it actively trades in shares that are in great demand in the process of buying and selling. In this case, the shares have high liquidity. In particular, this applies to leading companies in production and sales, which are also called "blue chips". The financial condition of such companies amounts to millions of dollars, and therefore they have such a powerful financial potential that they can withstand recessions in the economic system and the consequences of protracted crises.
A narrow market is generally considered the cardinal opposite of liquid markets. A narrow market is a market where financial products of various categories are concentrated that have a low level of supply and demand. A rather striking example of this type of market is the real estate market. Usually, when a person invests money in him, and wants to return it, he is faced with the fact that finding a buyer usually takes a lot of time.
Product liquidity has the same meaning. However, it differs from the market in that the liquidity of financial goods is influenced by specific specific factors specific only to them, in contrast to the market, where their characteristics would affect its liquidity.
If we take stocks on the stock market as an example, we can see that their very liquidity will be determined by the level of spread, the ability to quickly conclude sales and purchases, as well as the significant difference between supply and demand. The essence of the liquidity of the shares is that they have the property of turning pretty quickly into money, because their holder will not have to wait long for the conclusion of the transaction.
It turns out that the characteristic that determines the liquidity of shares immediately affects the volume of supply and demand and vice versa - the demand and supply for various kinds of shares forms their liquidity. Partially, the characteristics of supply and demand, the size of the spread, and the trading volume affect the liquidity of the market. Therefore, it is logical that investors prefer assets with high liquidity, which also guarantees brokers a reliable profit.
The term liquidity of the market or financial instruments is used to describe the frequency and size of the volume of trade occurring. Markets that provide liquidity are called liquidity pools.
To carry out the process of selling or buying a financial document, you must have a buyer expressing a desire to buy it. A high liquidity ratio means that a fairly considerable number of market participants want to act as a buyer in the act of sale. A high level of liquidity can be achieved both by using the services of individual traders who are ready to act as counterparties, or through the influence of large owners of financial documents that would express a desire to participate in the transaction.
Market liquidity gives its advantages to each of the market participants, in particular because it usually lowers the level of risk and offers a larger list of buying or selling opportunities at the desired price policy indicator. Demand for high liquidity indicators is one of the key points that benefit online trading for the economic system. The bid price is reduced, which allows traders to participate in trading with much lower capital without facing the problem of huge costs due to spreads.
Securities Liquidity
The stock market liquidity indicator is most often estimated according to the number of transactions that are made there (trading volume) and the spread size. Spread is the difference between the highest possible prices of buy orders and the lowest high prices in sell orders (which can be seen in a glass of trading terminals). The larger the number of transactions and the smaller the difference, the greater the liquidity indicator.
There are two main ways to conclude transactions:
- Quotation - in which a person puts up his own application for a sale or purchase, indicating the desired price immediately.
- Market - placing an order in order to be immediately executed on market bids with current prices for supply or demand (satisfying quoted bids with the best price).
A quotation request forms an instant market liquidity. In it, the author indicated the amount acceptable from his point of view and is waiting for the satisfaction of his request, which allows other bidders to sell or buy a specific number of assets at any price at the price agreed by the author. The more the author put up quotes for traded assets, the higher is his instant liquidity.
The function of market orders is to generate an indicator of market trading liquidity. Here the author indicates the volume, but the price is automatically calculated based on the best price indicators from the current list of quotation bids. This gives the authors the opportunity to conclude as many trading transactions as possible on the purchase or sale of a certain amount of the asset. The more market requests for an instrument come, the greater is its trading liquidity.
Money liquidity
As for cash, their liquidity is the ability to use them as cash and pay payments, as well as keep the nominal value unchanged.
Most often, money is the holder of the greatest liquidity based on the framework of a particular economic system. However, they are not always easy to exchange for goods. For example, the list of reserve requirements of central banks includes a refusal to send all bank funds without exception. Changing (both up and down) the size of the reserve requirements fetters or releases a certain amount of money corresponding to the requests.
It is generally accepted that the list of properties of money includes “perfect liquidity”, that is, they can be exchanged for goods at any time, and this can happen in an extremely short time. That money is much more than other means that are protected from the risk of fluctuations in value. It is worth noting that the volume of the asset's return depends on the height of the degree of liquidity: the higher the first indicator, the lower the second.
The liquidity of each element (type) of money is not the same. For example, money from a current deposit is much more liquid than securities that may be sold on stock markets.
Bank liquidity
When a bank grants a loan, the amount of money that is stored there decreases. And the more funds he gives out - the greater the risk that there may not be enough money finance to return the deposit. In such situations, they speak of a decrease in the bank's liquidity level.
Its increase is served by several required reserves. In addition, the bank is also able to turn to the central bank and ask for a temporary loan, which will be considered as additional liquidity. If banks have excessive liquidity, this encourages them to place funds, even considering securities. Lowering the bank's liquidity level leads to the sale of the lion's share of assets, including securities.
Net working capital
Net working capital is used to maintain the financial stability of the company, because the excess of the level of working capital over short-term liabilities will mean that the company is able to not only pay off the entire list of its short-term liabilities, but also is able to expand its activities at the expense of its own reserves.
The optimal amount of accumulated working capital in its pure form directly depends on the narrowly targeted features of the enterprise, including the scale of the company, the volume of goods sold, the speed of turnover, inventories and receivables. If working capital is not enough, this means the company’s inability to pay short-term liabilities on time.
If there is a significant excess of net working capital over the size of the optimal demand, this indicates that the resources of the enterprise are used irrationally. Of critical importance for analytics is the process of considering the growth rate of its working capital based on indicators of inflation.
We briefly examined what liquidity indicators are: liquidity of an enterprise, current, quick, absolute liquidity, liquidity of the market, securities, money and a bank, net working capital. Leave your additions and comments on the article.
From this article you will learn:
Short-term liabilities (P2) - short-term borrowed loans from banks and other loans payable within 12 months after the reporting date. In determining the first and second groups of liabilities, in order to obtain reliable results, it is necessary to know the time of fulfillment of all short-term obligations. In practice, this is only possible for internal analytics. In an external analysis, due to the limited information, this problem is greatly complicated and solved, as a rule, based on the previous experience of the analyst performing the analysis.
Long-term liabilities (P3) - long-term borrowed loans and other long-term liabilities - section IV of the balance sheet “Long-term liabilities".
Permanent liabilities (P4) - the articles of section III of the balance sheet “Capital and reserves” and certain articles of section V of the balance sheet that were not included in the previous groups: “Incomes of future periods” and “Reserves for future expenses”. To maintain the balance of the asset and liability, the result of this group should be reduced by the amount under the articles “Deferred expenses” and “Losses”.
To determine the balance sheet liquidity, one should compare the results for each group of assets and liabilities.
The balance is considered absolutely liquid if the following conditions are met:
A1 \u003e\u003e P1
A2 \u003e\u003e P2
A3 \u003e\u003e P3
A4
If the first three inequalities are satisfied, that is, current assets exceed the external liabilities of the enterprise, then the last inequality, which has deep economic meaning, is necessarily fulfilled: the enterprise has its own working capital; the minimum condition of financial stability is observed.
Failure to comply with any of the first three inequalities indicates that the liquidity of the balance sheet is more or less different from absolute.
Current ratio
The current liquidity ratio shows whether the enterprise has enough funds that can be used by it to pay off its short-term obligations during the year. This is the main indicator of the solvency of the enterprise. Current ratio is determined by the formula
Ktl \u003d (A1 + A2 + A3) / (P1 + P2)
Quick ratio
The quick ratio, or the coefficient of "critical assessment", shows how much the company's liquid assets cover its short-term debt. Quick ratio is determined by the formula
Kbl \u003d (A1 + A2) / (P1 + P2)
Absolute liquidity ratio
Absolute liquidity ratio shows which part of accounts payable the company can pay off immediately. Absolute liquidity ratio is calculated by the formula
Cal \u003d A1 / (P1 + P2)
The total liquidity balance sheet
For a comprehensive assessment of the balance sheet liquidity as a whole, it is recommended to use the general indicator of the balance sheet liquidity, which shows the ratio of the sum of all liquid assets of the enterprise to the sum of all payment obligations (short-term, long-term, medium-term), provided that various groups of liquid assets and payment obligations are included in the indicated amounts with certain weighting factors, taking into account their significance in terms of the timing of receipt of funds and repayment of obligations.
The total liquidity balance sheet is determined by the formula
Col \u003d (A1 + 0.5A2 + 0.3A3) / (P1 + 0.5P2 + 0.3P3)
During the analysis of the balance sheet liquidity, each of the considered liquidity ratios is calculated at the beginning and end of the reporting period. If the actual value of the coefficient does not correspond to the normal limit, then it can be estimated by the dynamics (increase or decrease of the value).
Liquidity analysis
The balance sheet liquidity is the degree to which the liabilities of an enterprise are covered by assets, the period of converting of which into cash corresponds to the maturity of liabilities. The solvency of the enterprise depends on the degree of liquidity of the balance sheet. The main sign of liquidity is the formal excess of the value of current assets over short-term liabilities. And the greater this excess, the more favorable the financial condition of the enterprise from the position of liquidity.The relevance of determining liquidity balance is of particular importance in conditions of economic instability, as well as in the liquidation of the enterprise as a result of it. This raises the question: does the enterprise have enough funds to cover its debts. The same problem arises when it is necessary to determine whether an enterprise has sufficient funds to settle accounts with creditors, i.e. ability to liquidate (repay) debt with available funds. In this case, speaking of liquidity, we mean the presence of working capital in the enterprise in the amount theoretically sufficient to pay off short-term liabilities.
To conduct an analysis of the liquidity of the balance sheet of an enterprise, assets are grouped according to the degree of liquidity, from the most quickly converted to the least. Liabilities are grouped by the urgency of payment of obligations.
To assess the balance sheet liquidity taking into account the time factor, it is necessary to compare each asset group with the corresponding liability group.
1) If the inequality A1\u003e P1 is feasible, then this indicates the solvency of the organization at the time of the balance sheet. The organization has enough to cover the most urgent obligations of the absolutely and most liquid assets.
2) If the inequality A2\u003e P2 is feasible, then quickly realized assets exceed short-term liabilities and the organization may be solvent in the near future, taking into account timely settlements with creditors, receiving funds from the sale of products on credit.
3) If inequality A3\u003e P3 is feasible, then in the future, with timely receipt of cash from sales and payments, the organization may be solvent for a period equal to the average duration of one turnover of working capital after the balance sheet date.
The fulfillment of the first three conditions automatically leads to the fulfillment of the condition: A4
The fulfillment of this condition indicates compliance with the minimum conditions for the financial stability of the organization, the availability of its own working capital.
On the basis of a comparison of groups of assets with the corresponding groups of liabilities, a judgment is made on the liquidity of the balance sheet of the enterprise
Comparison of liquid assets and liabilities allows you to calculate the following indicators:
Current liquidity, which indicates the solvency (+) or insolvency (-) of the organization for the closest time to the moment in question: A1 + A2 \u003d\u003e P1 + P2; A4 prospective liquidity is a solvency forecast based on a comparison of future receipts and payments: A3\u003e \u003d P3; A4 insufficient level of prospective liquidity: A4 balance sheet is not liquid: A4 \u003d\u003e P4
However, it should be noted that the analysis of the balance sheet liquidity carried out according to the above scheme is approximate, and the analysis of solvency using financial ratios is more detailed.
1. The current liquidity ratio shows whether the enterprise has enough funds that can be used by it to pay off its short-term obligations during the year. This is the main indicator of the solvency of the enterprise. The current ratio is determined by the formula:
K \u003d (A1 + A2 + A3) / (P1 + P2)
In world practice, the value of this coefficient should be in the range of 1-2. Naturally, there are circumstances in which the value of this indicator may be greater, however, if the current liquidity ratio is more than 2-3, this usually indicates the irrational use of the company's funds. The value of the current liquidity ratio below unity indicates the insolvency of the enterprise.
2. The quick ratio, or the coefficient of "critical assessment", shows how much liquid assets of the enterprise cover its short-term debt. Quick ratio is determined by the formula:
K \u003d (A1 + A2) / (P1 + P2)
The liquid assets of the enterprise include all current assets of the enterprise, with the exception of inventory. This indicator determines what proportion of accounts payable can be repaid at the expense of the most liquid assets, that is, it shows how much of the company's short-term liabilities can be immediately repaid at the expense of funds in various accounts, in short-term securities, as well as receipts from settlements. The recommended value of this indicator is from 0.7-0.8 to 1.5.
3. The absolute liquidity ratio shows how much of the payables the company can pay off immediately. The absolute liquidity ratio is calculated by the formula:
K \u003d A1 / (P1 + P2)
The value of this indicator should not fall below 0.2.
4. For a comprehensive assessment of the balance sheet liquidity as a whole, it is recommended to use the general indicator of the balance sheet liquidity, which shows the ratio of the sum of all liquid assets of the enterprise to the sum of all payment obligations (short-term, long-term, medium-term), provided that various groups of liquid assets and payment obligations are included the indicated amounts with certain weighting factors, taking into account their significance in terms of the timing of receipt of funds and repayment of obligations. The total liquidity balance sheet is determined by the formula:
K \u003d (A1 + 0.5 * A2 + 0.3 * A3) / (P1 + 0.5 * P2 + 0.3 * P3)
The value of this coefficient must be greater than or equal to 1.
5. The ratio of own funds shows how sufficient own working capital of the enterprise, necessary for its financial stability. It is determined by:
K \u003d (P4 - A4) / (A1 + A2 + A3)
The value of this coefficient should be greater than or equal to 0.1.
6. The maneuverability coefficient of functional capital shows how much of the functioning capital is held in stocks. If this indicator decreases, then this is a positive fact. It is determined from the ratio:
K \u003d A3 / [(A1 + A2 + A3) - (P1 + P2)]
During the analysis of the balance sheet liquidity, each of the considered liquidity ratios is calculated at the beginning and end of the reporting period. If the actual value of the coefficient does not correspond to the normal limit, then it can be estimated from the dynamics (increase or decrease in value). It should be noted that in most cases, achieving high liquidity is contrary to ensuring higher profitability. The most rational policy is to ensure the optimal combination of liquidity and profitability of the enterprise.
Along with the above indicators, indicators based on: net cash flow (NCF - Net Cash Flow) can be used to assess liquidity status; cash flow from operating activities (CFO - Cash Flow from Operations); cash flow from operating activities, adjusted for changes (OCF - Operating Cash Flow); cash flow from operating activities, adjusted for changes in working capital and meeting the need for investments (OCFI - Operating Cash Flow after Investments); free cash flow (FCF - Free Cash Flow).
At the same time, regardless of the stage of the life cycle at which the enterprise is located, management is forced to solve the problem of determining the optimal level of liquidity, since, on the one hand, insufficient liquidity of assets can lead both to insolvency and possible bankruptcy, and on the other hand, excess liquidity may lead to a decrease. In view of this, modern practice requires the appearance of more and more advanced procedures for analyzing and diagnosing liquidity.
Absolute liquidity
Absolute liquidity ratio (Eng. Cash ratio) - a financial ratio equal to the ratio of cash and short-term financial investments to short-term liabilities (current liabilities). The data source is the company's balance sheet in the same way as for current liquidity, but only cash and cash equivalents are taken into account in its assets: (line 260 + line 250) / (line 690-650 - 640).Cal \u003d (Cash + short-term financial investments) / Current liabilities
Cal \u003d (Cash + short-term financial investments) / (Short-term liabilities - deferred income - Reserves for future expenses)
It is believed that the normal value of the coefficient should be at least 0.2, that is, 20% of urgent obligations can potentially be paid every day. It shows how much of the short-term debt the company can pay off in the near future.
Absolute liquidity - the highest level of liquidity; inherent in money.
Liquidity ratios
An enterprise may be liquidated to a greater or lesser degree, since the composition of current assets includes heterogeneous working capital, among which there are both easy to sell and hard to sell to repay external debt.According to the degree of liquidity, items of current assets can be conditionally divided into three groups:
1. liquid funds in immediate readiness for sale (cash, highly liquid securities);
2. liquid funds at the disposal of the enterprise (customer obligations, inventory holdings);
3. illiquid funds (requirements for debtors with a long education period (doubtful accounts receivable), work in progress).
The assignment of certain items of current assets to these groups may vary depending on specific conditions: the company's debtors include very diverse items of receivables, and one part may fall into the second group, the other into the third; for various lengths of the production cycle, work in progress can be assigned either to the second or third group, etc.
Short-term liabilities include liabilities of varying urgency. In the practice of conducting financial analysis, the following indicators are used:
Current ratio;
quick ratio;
absolute liquidity ratio.
Using these indicators, you can find the answer to the question of whether the company is able to fulfill its short-term obligations in time. This applies to the most liquid part of the company's property and its obligations with the shortest payment term. These indicators are calculated on the basis of balance sheet items. In the balance sheet, assets are distributed in accordance with the degree of liquidity or depending on the time required for their conversion into cash. Liquidity indicators reveal the nature of the relationship between current assets and short-term liabilities (current liabilities) and reflect the company's ability to timely fulfill its financial obligations.
The current ratio, or working capital ratio, is derived as follows:
Current ratio \u003d Current assets (5) \\ Short-term liabilities (14)
In 1992, 610/220 \u003d 2.8
in 1993, 700/300 \u003d 2.3
So many Czech crowns account for one crown of short-term liabilities.
The current liquidity ratio shows how many times short-term liabilities are covered by the current assets of the company, i.e. how many times is a company capable of satisfying creditors' requirements if it turns into cash all the assets it currently has at its disposal.
If a company has certain financial difficulties, of course, it repays the debt much more slowly; additional resources are sought (short-term bank loans), trade payments are postponed, etc. If short-term liabilities increase faster than current assets, the current liquidity ratio decreases, which means (under unchanged conditions) that the company has liquidity problems.
The current liquidity ratio depends on the size of individual active items and on the duration of the turnover cycle of certain types of assets. The longer their turnover cycle, the seemingly higher the “security level” of the company. However, it is necessary to separate really functioning assets from those that externally improve the indicator in question, but in fact do not have an effective impact on the enterprise. Thus, the current liquidity ratio depends on the structure of stocks and on their correct (actual) assessment in terms of their liquidity; from the structure of receivables payable in connection with the expiration of the statute of limitations, unreliable debts, etc.
The current liquidity ratio shows the extent to which short-term liabilities are covered by short-term assets that should be converted into cash for a period approximately corresponding to the maturity of short-term debt. Therefore, this indicator measures the ability of the enterprise to fulfill its short-term obligations.
According to standards, it is believed that this coefficient should be between 1 and 2 (sometimes 3). The lower limit is due to the fact that current assets should be at least sufficient to repay short-term liabilities, otherwise the company may be insolvent for this type of loan. The excess of current assets over short-term liabilities by more than two times is also considered undesirable, since it indicates the company's irrational investment of its funds and their inefficient use. In addition, special attention in the analysis of this coefficient is drawn to its dynamics.
Accounts receivable in the balance sheet are already cleared of doubtful debts. Stocks are easily tradable.
Kovoplast JSC is able to cover its obligations at the expense of current assets.
Quick ratio (acid test, quick ratio). Not all company assets are equally liquid; the least liquid article of current assets with the slowest turnover can be called stocks. Cash can serve as a direct source of payment of current liabilities, and stocks can be used for this purpose only after their realization, which implies not only the presence of the buyer, but also the availability of money from the buyer. This includes stocks of not only finished products, but also semi-finished products, raw materials, materials, etc. The stagnation of finished products may disrupt the feasibility of stocks. Therefore, when measuring the ability to fulfill obligations, when testing liquidity as of a certain moment, reserves are excluded.
Quick liquidity ratio \u003d (“Current assets” - “Reserves” \\ “Short-term liabilities”
For analysis, it is useful to consider the relationship between the quick ratio and current ratio. A very low urgent liquidity ratio indicates an excessively high weight of stocks in the company's balance sheet. A significant difference between these indicators is noted mainly in the balance sheets of commercial companies, where it is assumed that stocks circulate quickly and have high liquidity. At enterprises whose activities are seasonal in nature, there may also be large stocks, especially before the start of the sale season or immediately after its end. However, throughout the year, this seasonal “irregularity” levels out.
At Kovoplast, the quick ratio can be considered satisfactory, the company is able to cover its obligations and does not feel the need to sell its stocks.
The most liquid items of working capital are cash held by the company in bank accounts and at the cash desk, as well as in the form of securities. The ratio of cash to current liabilities is called the absolute liquidity ratio. This is the most stringent solvency criterion, showing how much of short-term liabilities can be repaid immediately.
Absolute liquidity ratio \u003d (Money + Short-term securities) \\ Short-term. obligate
Asset liquidity
Asset liquidity is the ability of assets to compete against the market price. The fact of turning into money is liquidity. There are three groups of assets in the financial world - these are highly liquid, low liquid and illiquid assets.Highly liquid assets are, of course, cash and securities of the largest enterprises.
Real estate, stocks and small companies are considered low liquid.
Illiquid assets are those assets that are not a product of stock markets and do not cause interest from other shareholders.
A company achieves high liquidity if its assets are bought at a price much higher than sold, this difference determines the indicator and liquidity level, which is achieved mainly when there are a large number of sellers and buyers in the market. Often, organizations artificially raise trading volume in order to trigger transactions with assets.
Before buying shares of small companies, the market forecast in a calm time and during market shocks is of great importance, otherwise the purchase of such shares may result in financial loss or freezing of money during the crisis, although the price of low liquid assets in difficult financial periods can sometimes reach a high level.
To summarize: asset liquidity is the ability of assets to be quickly sold at a price close to the market.
Liquidity calculation
The purpose of the liquidity analysis is to assess the ability of the enterprise to fully fulfill short-term obligations at the expense of current assets in a timely manner.Liquidity (current solvency) is one of the most important characteristics of the financial condition of an organization, determining the ability to pay bills on time and is actually one of the indicators of bankruptcy. The results of the liquidity analysis are important from the point of view of both internal and external users of information about the organization.
Calculation and interpretation of key indicators
To assess liquidity, use the following indicators:
The total liquidity ratio characterizes the company's ability 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 the organization.
The current liabilities of the Russian Balance contain elements that, by their nature, are not liabilities to redemption — these are deferred income and reserves for future expenses and payments. Assessing the organization’s ability to pay for short-term obligations, it is advisable to exclude these components from the current liabilities.
Total liquidity set \u003d Current assets / (Current liabilities - (BP income + PRP reserves))
Where
BP income - deferred income, monetary units
Reserves of the PRP - reserves for future expenses and payments
The items listed above are included in current liabilities.
All indicators used in the calculations must relate to the same reporting date.
Absolute (instant) liquidity ratio reflects the company's ability to fulfill short-term obligations due to free cash and short-term financial investments
Absolute liquidity set \u003d Cash + KFV / (Current liabilities - (BP income + PRP reserves))
Where
KFV - short-term financial investments, monetary unit
The urgent (intermediate) liquidity ratio characterizes the ability of an enterprise to fulfill short-term obligations due to the more liquid part of current assets.
When calculating this indicator, the main issue is the separation of current assets into liquid and low liquid parts. This issue in each case requires a separate study, since only cash can be attributed unconditionally to the liquid part of assets.
In the classical version of the calculations of the intermediate liquidity ratio, the most liquid part of current assets is understood as cash, short-term financial investments, undelayed receivables (accounts receivable) and finished goods in stock.
Settlement of urgent liquidity \u003d Cash + KFV + Deb. Debt + Finished goods / (Current liabilities - (BP income + PRP reserves))
For enterprises with significant reserves of future expenses and (or) deferred income, liquidity ratios calculated without adjusting current liabilities will be unreasonably underestimated. It should be borne in mind that the liquidity indicators of Russian enterprises are already low.
When calculating the liquidity indicators of an enterprise there are fewer difficulties than in interpreting them. For example, the managerial interpretation of the absolute liquidity indicator in fractional terms (0.05 or 0.2) is difficult. How to evaluate whether the obtained value is optimal, acceptable or critical for the enterprise? To get a clearer picture of the state of liquidity of the enterprise, it is possible to calculate the modification of the absolute liquidity ratio - the coverage ratio of average daily payments in cash.
The meaning of this calculation is to determine how many "payment days" cover the funds available to the company.
The first step in the calculation is to determine the amount of average daily payments made by the organization. The source of information on the value of average daily payments can be a report on financial results (form N2), or rather, the sum of the values \u200b\u200bfor the positions of this report “Cost of sales”, “”, “Management expenses”. Non-cash payments, such as depreciation, must be deducted from this amount. Such a 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 stocks of materials and finished products in stock. In this regard, the value of real payments associated with the implementation of the production process can be much larger than the cost of sales reflected in form N2. Another feature of the Russian business, which should be taken into account in the calculations, is barter operations, in which part of the resources used in the production process is paid not by money, but by 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 (net of depreciation), but subject to changes in the balance sheet items “Production inventories”, “Work in progress” and “Finished goods”, taking into account tax payments for the period and net of material resources received through barter.
Correct is the accounting of both positive (increase) and negative (reduction) growth in inventories, work in progress and finished goods.
Thus, the calculation of average daily payments is carried out according to the formula:
Cash payments for the period \u003d (s / s of production + management expenses + selling expenses) for the period * (1 - the share of barter in costs) - for the period + Tax payments for the period * (1-share of barter in taxes) + Increase in stocks of materials , work in progress, finished goods for the period * (1-share of barter in costs) + .. other cash payments.
The source of information on the cost of sales is a report on financial results. The source of information on the magnitude of the growth of inventories, work in progress, finished products is the aggregate balance.
Note that for the calculation it is necessary that
Information of form No. 2 was submitted for the period (not cumulative);
all indicators used in the calculations were related to the same time period.
For a more accurate calculation of average daily payments, in addition to information about the costs of production and sales of products, you can take into account tax payments for the period, expenses for the maintenance of the social sphere and other periods. However, the principle of reasonable sufficiency must be observed - in calculations it is recommended to take into account only “weighty for” payments. Thus, enterprises can create individual modifications to the formula for calculating average daily payments.
For example, depreciation charges cannot be excluded from the cost of goods sold. Thus, it is possible to compensate for a part of other payments that need to be included in the calculation (for example, taxes or payments in the social sphere).
The total amount of taxes paid for the period is not directly allocated in form No. 2, therefore it is possible to limit it (allocated in form No. 2).
If the share of offsets and barter in the calculations of the enterprise is small, you can ignore the correcting factors of the formula, designated as (1-share of barter).
If the share of barter (offsets) in the organization’s calculations is small and other cash costs are comparable to the depreciation charged for the period, the calculation of cash costs for the period can be carried out according to the formula
Cash payments for the period \u003d (s / s of production + management expenses + business expenses + income tax + increase in stocks of materials, work in progress, finished goods) for the period.
To determine the value 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).
Average daily payments \u003d cash costs per period / Interval
To determine how many “payment days” the company’s cash covers, it is necessary to divide the cash balance on the Balance by the amount of average daily payments.
Coverage ratio of average daily payments in cash \u003d Cash balance (according to the Balance) / Average daily payments
When calculating the coverage ratio of average daily payments by cash, a fair observation may arise: the balance of cash on the Balance may not fully 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, in connection with this, the balance of funds on the Balance Sheet is insignificant. The opposite situation is possible: during the analyzed period, the cash balance of the enterprise was insufficient, but shortly before the reporting date, the customer repaid the debt, in connection with this, the amount of cash in the company's current account increased.
Note that both the classic absolute liquidity indicator and liquidity in payment days are based on data reflected in the Balance Sheet. In this regard, the error of both coefficients is the same.
The obtained liquidity values \u200b\u200bin payment days are more informative than liquidity ratios and allow determining the absolute liquidity values \u200b\u200bacceptable for the enterprise.
For example, the head of an enterprise that has stable terms of settlements with suppliers and customers, which produces mass-produced products, believes that the coverage ratio of average daily payments in cash of 10-15 days is quite acceptable. That is, the balance of funds covering 15 days of average payments is considered acceptable. In this case, the absolute liquidity ratio may be 0.08, that is, be lower than the value recommended in Western practice of financial analysis.
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 \u200b\u200bof the coefficients are compared with industry average. Despite the fact that the optimal values \u200b\u200bof liquidity ratios for a particular industry and a certain enterprise are unique, the following values \u200b\u200bare often used as a guideline:
For the ratio of total liquidity - more than 2,
for absolute liquidity ratio - 0.2 - 0.3,
for the ratio of intermediate liquidity - 0.9 - 1.0.
In Russia, there is no updated statistical database of optimal values \u200b\u200bof liquidity indicators of enterprises (organizations) of various fields of activity. Therefore, in Russian practice, when evaluating liquidity, it is recommended
Pay attention to the dynamics of the coefficients;
determine the values \u200b\u200bof the coefficients that are permissible (optimal) for this particular enterprise
It is known that the organization’s ability to meet current obligations depends on two fundamental points:
Terms of mutual settlements with suppliers and buyers;
liquidity levels of current assets (property structure)
The conditions listed above are basic when calculating the total liquidity ratio acceptable for this particular enterprise.
The calculation of the acceptable value of total liquidity is based on the following rule - to ensure an acceptable level of liquidity of an organization, it is necessary that the least liquid current assets and part of current payments to suppliers not covered by receipts from buyers be financed from equity. Thus, the first calculation step is to determine the amount of equity required 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 equity required to cover current payments to suppliers represents the total amount of equity that must be invested in the current assets of the organization to ensure an acceptable level of liquidity. In other words, this is the value of current assets, which should 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, you can determine the acceptable amount of borrowed sources of financing of current assets - that is, the allowable 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 allowable amount of current liabilities.
Liquidity management
As a rule, companies and enterprises have a very large number of different accounts opened with many banks. Every day, financial services have to solve complex problems in order to ensure the liquidity of aggregate funds to ensure payment obligations:From what accounts, how much, when and where to transfer funds?
How to transfer funds?
How to prevent cash gaps?
What is the minimum required total balance in bank accounts, etc.
The “Liquidity Management” solution, which is based on the functionality of SAP Cash and Liquidity Management, provides financial management with the necessary tool to fulfill all emerging cash flow management tasks.
Liquidity management is integrated with other application components, for example, cash inflows / outflows of financial accounting, procurement management and sales management.
Liquidity management performs the following operational tasks:
Daily allocation of funds (short-term perspective)
o Processing bank statements
o Filling in the Daily Summary (cash position) with additional information
o Making payments
o Concentration of funds in accordance with the payment strategy
o Financial transactions
Daily liquidity forecast (medium-term perspective)
o View current orders, delivery status, invoices
o Analysis of currencies and financial transactions
Regular liquidity planning (long-term perspective)
o Analysis of liquidity plans (payment calendar)
o Development of an effective liquidity strategy
The daily financial statement (short-term view) is the result of entering all payments within a short time horizon. The daily financial status report is available from various sources:
Bank postings and postings of a current account in a bank;
expected incoming or outgoing payments from investments / raising funds in,
FI postings on G / L accounts relevant for cash management;
manual entry of individual entries (memos);
cash flows of business transactions managed through the Financial Management component.
Liquidity forecast (medium-term perspective) shows the movement of liquidity in the accounts. The information displayed refers to expected payment flows.
The liquidity forecast is based on incoming and outgoing payments for each position of debtors and creditors. Since the planning and forecasting of these payments is usually long-term, the probability that the payment will be made on the planned day is less than the probability of payment recorded in the daily financial statement.
The liquidity forecast integrates the incoming and outgoing payments of financial accounting (example: open positions), sales (example: orders) and purchases (example: supply orders) to analyze medium- and long-term liquidity dynamics.
Liquidity risk
Liquidity risk is one of the main types that a risk manager needs to pay attention to. Two similar in name, but different, in essence, concepts of liquidity risk should be distinguished: - the liquidity risk is the risk that the real price of a transaction can differ significantly from the market price for the worse. This is a market liquidity risk. - liquidity risk refers to the danger that the company may be insolvent and unable to fulfill its obligations to counterparties. This is the risk of carrying liquidity. One of the consequences associated with the process of finance and financial risk was the growing influence of market liquidity on portfolio risk.Almost all modern models and methods for assessing the market risk of a portfolio require input of the price values \u200b\u200bof the assets that make up the portfolio as input. As a rule, average market prices at some point in time or the price of the last transaction are used. But the real price of each particular transaction almost always differs from the average market. There is no concept of “market price” on the market; at any given time there is a demand price and a supply price.
As long as the market situation is stable and in a balanced state, the costs of concluding a transaction do not have a strong impact on portfolio risk, which can be fairly accurately estimated. But when the market goes out of equilibrium, panic or crisis begins on it, transaction costs can increase by tens and hundreds of times.
For any operation on the market, it is necessary to have a counterparty to the transaction who wishes to perform the opposite operation. In the event of a market crisis, this is violated. If most market participants will strive to complete a deal in one direction, then there will not be enough counterparties for all market participants. If the transaction is large, you will either have to spend a lot of time waiting for a suitable price, being exposed to market risk all the time, or incur high transaction costs due to liquidity risk.
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The balance sheet is the main form of financial statements that characterizes the financial position of the organization as of the reporting date (paragraph 18 of PBU 4/99). In addition, the balance sheet acts as an information base for analysis, during which various factors are determined, and as a result, management decisions are made. One of the areas of analysis of this reporting form is the analysis of liquidity balance. Recall that liquidity is their ability to turn into money. Accordingly, the higher the rate of such a transformation, the assets are considered more liquid. The organization’s completely liquid assets are money. Let's talk about the main ratios calculated in assessing the liquidity of the balance sheet.
Group assets by liquidity
Analysis of liquidity balance sheet begins with determining the degree of liquidity of certain assets. For this purpose, the organization’s assets are divided into 4 groups - from the most liquid to difficult to sell assets. Imagine this grouping in the table:
Within the selected groups, the liquidity of an organization’s assets may be conducted.
Balance sheet liquidity ratios
When calculating liquidity indicators, the value of assets is related to the amount of liabilities in the liability of the balance sheet.
For the liquidity ratio, the formula for the balance sheet may be as follows (Order of the Ministry of Finance of 02.07.2010 No. 66n):
K AL \u003d (line 1240 + line 1250) / (line 1510 + line 1520 + line 1540 + line 1550)where K AL - absolute liquidity ratio;
line 1510 - “Borrowed funds”;
line 1520 - “Accounts payable”;
line 1540 - “Provisions”;
line 1550 - “Other liabilities”.
Absolute liquidity ratio shows the organization's ability to repay its current liabilities at the expense of the most liquid assets. The standard value of K AL e 0.2.
When it is necessary to determine the organization’s ability to repay its current liabilities at the expense of the most liquid and quickly sold assets, it is calculated by the quick liquidity ratio (KL), the recommended value for which is from 0.7 to 1:
To BL \u003d (line 1210 + line 1230 * + line 1240 + line 1250 + line 1260) / (line 1510 + line 1520 + line 1540 + line 1550)* line 1230 - in terms of short-term receivables.