Any enterprise should be solvent. The ability of a company to repay liabilities can be assessed by analyzing the level of liquidity. A general indicator in this case is the adequacy of sources of formation of reserves.
Features of liquidity assessment
The need for a balance study arises in market conditions due to tightening financial constraints and the need to study the creditworthiness of the company.
The liquidity of the balance sheet reflects the level of coverage of liabilities with assets, the duration of the period of transformation of which into cash corresponds to the repayment period. The analysis consists in comparing assets grouped by liquidity in descending order with liabilities grouped in liabilities by maturity in ascending order. Using absolute indicators, you can determine which sources and in what volume are directed to cover stocks.
Liquidity ratio
The company may have:
- The most liquid assets. These are means, the period of conversion of which into cash is not more than 3 months. This group includes cash (260th line of the balance sheet), as well as financial short-term investments (250th line).
- Fast-selling assets (A2 ). The period of their conversion into cash is 3-6 months. Accounts receivable for which revenues are expected during the year are classified as quick-sale assets (balance line 240).
- Slowly realized assets (A3). The term for converting these funds into cash is 6-12 months. This group includes reserves and costs (lines 210 + 220), accounts receivable, deductions for which the company expects more than 12 months later. after the reporting date (230th line), as well as other current assets (270th line).
- Hard-to-sell assets (A4). For them, the period for turning into cash is set to more than 1 g. Non-current assets are included in this group (line 190).
Grouping of liability items
It is carried out depending on the maturity of obligations:
- The most urgent obligations. Their maturity is up to 3 months. This group includes accounts payable (260th line of the balance sheet).
- Urgent obligations. Their maturity is 3-6 months. This group includes loans and borrowings (610th line), other liabilities - short-term (660th line).
- Long term duties. For their repayment, a period of 6-12 months is established. This group includes long-term liabilities (590th line), arrears of founders' income (p. 630), profit for the coming periods (p. 640), reserves for future expenses (650th line).
- Permanent (stable) liabilities. They include reserves and capital (line 490).
Company liquidity
An entity will be considered liquid if short-term liabilities are less than quick-sale assets. It may be so to a lesser or greater extent.
A company with working capital, consisting mainly of short-term receivables and cash, is considered more liquid than an enterprise whose capital is mostly formed by reserves.
Balance sheet liquidity
To determine it, it is necessary to compare the results of the asset and liability groups. The balance shows absolute liquidity at the following ratios:
A1> P1, A2> P2, A3> P3, A4 <P4.
In the presence of the first 3 inequalities, the fourth will be satisfied. Accordingly, only a comparison of the final results of the first 3 groups is of practical importance. The last inequality has a “balancing" character. However, it has a special economic meaning. If it is fulfilled, then the enterprise observes the minimum condition for recognizing the company financially stable - the availability of its own working capital.
Characterization of Inequalities
Comparison of the final results of the first group of assets and liabilities shows the ratio of current contributions and income to the enterprise.
Comparison of quickly realized assets and liabilities with a period of 3-6 months. shows a decrease or increase in liquidity in the near future.
Comparison of the final results of the last two groups reflects the ratio of deductions and payments in the distant future.
Nuances
If a sign opposite the above is established in several inequalities, liquidity will be less or less different from absolute. The deficit of funds of one group will be compensated by the excess of another. Although it is worth saying that it takes place only in terms of value, since in practice less liquid assets cannot replace quickly traded assets.
Types of liquidity
The analysis can be carried out for the current period or for the coming time. A comparison of the most urgent liabilities and the most liquid assets is a way of determining current liquidity. The analysis for the future is carried out by comparing slowly sold funds with medium- and long-term liabilities.
Current liquidity, which can also be determined by comparing everything that is a quick-sale asset with short-term liabilities, indicates the solvency (or insolvency) of the company for the period closest to the moment being analyzed. Accordingly, forward-looking liquidity is a forecast formed on the basis of upcoming receipts. It should be noted that they are represented in the asset and liability balance only partially, therefore, the analysis will be approximate.
Analysis example
Consider the situation when, when comparing the final results of the groups, the following inequalities are obtained:
A1 <P1, A2> P2, A3 <P3, A4> P4.
The following conclusions can be formulated from them:
- The company is insolvent for the most urgent (current) obligations with a maturity of up to 3 months.
- The company is solvent in respect of debt for a period of 3-6 months, since it has a sufficient volume of quickly sold assets .
- In the distant future (6-12 months), the company will not be able to repay its obligations.
The last inequality shows that the company is financially unstable. This means that in a critical situation own sources may not be enough, therefore, the company will have to use credit funds.
Additional indicators
When comparing liquid assets and liabilities, you can determine the overall liquidity ratio. It allows you to get a general idea of the solvency of the company. The coefficient reflects what proportion of all urgent, half short-term and 1/3 long-term liabilities the company can repay at the expense of the most liquid, half quick- selling assets and 1/3 of slow-moving funds.
The value of the coefficient with absolute solvency should be equal to or greater than one.
During the analysis, you can determine the absolute liquidity indicator. Based on this ratio, it is possible to determine what proportion of the most urgent and short-term debts a company can repay due to cash in the near future. A valid value is 0.2-0.7.
Another important factor is an indicator of urgent liquidity or, as it is also called, a “critical assessment”. It can be used to determine what proportion of short-term debts an enterprise can pay out of funds located on different accounts in securities (short-term), receipts from settlements with customers and consumers. This ratio reflects the expected financial capabilities of the company for a period equal to the average duration of one turnover of short-term accounts receivable with timely settlements with debtors.