Before proceeding to the consideration of the term “liquidity ratios”, it is necessary to understand what is meant by liquidity. The concept of liquidity refers to economic terminology. It means the ability of assets to quickly convert into cash. In other words - liquidity - money turnover. Liquidity and solvency ratios are of particular importance for determining the financial stability of any organization, including a commercial bank.
It is worth noting that the term "liquidity" and the term "liquidity ratio", despite the consonance, have different semantic meaning. Liquidity is understood as the ability to be converted into money or their equivalent for repayment of financial obligations. Moreover, particular importance is given to the speed of such a transformation.
Since liquidity determines the stability of the enterprise as a whole, this indicator is primarily of interest to investors, business owners, managers, etc.
The term "low liquidity" can speak not only about the time of the transformation of an asset, but also about the level of losses associated with such a transformation. For example, a specific fixed asset with a nominal value of 1 million per month can be converted into only 700 thousand in real cash terms.
Liquidity ratios are indicators that are used in assessing the organization’s ability to repay existing liabilities using the assets at its disposal.
Based on the fact that assets are characterized by varying degrees of liquidity, liabilities are also characterized by different periods of performance by the enterprise of obligations. Therefore, liquidity ratios make it possible to evaluate in numerical terms the ratios of identical liabilities to the sale of liabilities and assets.
Consider the liquidity ratios used in enterprises.
Current ratio , in other words, coverage ratio. It is a financial ratio, expressed as the ratio of current assets to current liabilities (short-term liabilities). It reflects the organization’s ability to pay its debt obligations during the duration of the production cycle. The quick ratio is a financial ratio equal to the ratio of highly liquid current assets to current liabilities. It reflects the ability of the organization to pay off its debt obligations during the duration of the production cycle in case of difficulties with the sale of finished products or goods.
Absolute liquidity ratio is a financial ratio equal to the ratio of short-term financial investments and cash to current liabilities.
It is worth noting that the following basic bank liquidity ratios are calculated for banks: instant liquidity, liquidity for derivatives and general liquidity ratio for derivatives.
It is difficult to establish acceptable and critical bank liquidity ratios for the largest banks, since processes reflecting liquidity in them are somewhat different from the generally accepted model. Thus, for such banks, the coefficients are more for reference.
In general, the liquidity and solvency ratios of any enterprise reflect the nominal value of the enterprise’s potential to cover current debts with existing current assets. The determination of such ratios is associated with the accounting of funds and accounting operations.