Quick liquidity ratio: balance sheet formula. Solvency indicators

One of the signs of financial stability of a company is solvency. If an enterprise can pay its short-term obligations at any time with cash resources, it is considered solvent.

This article discusses such concepts as liquidity, structure of the analytical balance sheet, formulas for quick liquidity ratios, current and absolute liquidity.

Solvency of the enterprise

The main indicator of the solvency of the enterprise is the absence of overdue payables and the presence on the current account of a sufficient amount of cash. These conditions will be fulfilled if the amount of liquid assets of the company exceeds the size of its short-term liabilities at a fixed point in time.

Current solvency is analyzed according to data on financial flows: cash flow should cover the performance of current liabilities. Prospective solvency is investigated using liquidity indicators.

Liquidity balance is the ability of a company to convert its assets into cash to pay off cash obligations. The less time is required for this operation, the higher the liquidity indicator of such an asset. In this case, the period of circulation should not exceed the period of performance of the obligation.

Liquidity of an enterprise is a more capacious concept. It can be defined as the ability of the enterprise using internal and external sources to seek means of payment in order to pay off its obligations.

Analysis Tasks

A liquidity analysis at the enterprise is carried out to check and adjust the solvency management of the enterprise. When conducting such an analysis evaluate:

• liquidity of current assets of the enterprise;
• liquidity balance of the company as a whole;
• solvency of the company at the moment and in the future;
• general company policy aimed at maintaining the required solvency;
• development prospects and recommendations for eliminating possible adverse factors.

Asset grouping

To analyze the liquidity balance, you need to compare the assets and liabilities of the company. For convenience, it is customary to divide them into several groups, that is, to draw up an analytical balance.

Balance assets, depending on their degree of liquidity, are divided into 4 groups.

• Group A1 includes absolutely liquid assets. This category includes financial investments (short-term) and cash. In the balance sheet, these are lines with codes 1240 and 1250.
• Group A2 includes assets whose implementation may take relatively little time. These include receivables (according to the balance sheet code 1230). Also, in some sources, group A2 includes other current assets. In this group, liquidity depends on the solvency of the company's counterparties, on the forms of settlements and the speed of payments.
• Group A3 contains slow-moving assets. This category includes stocks of products and materials, work in progress, VAT. It will take some time to convert their cash. In the balance sheet, group A3 includes lines with codes 1210, 1220 and 1260. Some authors include fixed assets in this category (code 1150).
• Finally, group A4 includes the most difficult to sell assets. This is the entire Section I of the balance sheet (code 1100).

Liabilities categories

All liabilities of the balance are divided depending on the urgency of their repayment into groups:

• Group P1 includes the most urgent liabilities, which include short-term payables to employees of the organization, the budget and extra-budgetary funds, contractors and suppliers, etc. (code 1520).
• Group P2 includes current liabilities. This category includes short-term loans and borrowings (code 1510), other liabilities (code 1550).
• P3 group includes long-term loans and borrowings (code 1410).
• Group P4 includes permanent liabilities, including equity funds (codes 1300, 1530, 1540).

Liquidity ratios

In addition to absolute indicators, relative indicators of solvency of the enterprise are used. There are absolute, quick and total liquidity ratios.

Consider the absolute liquidity ratio. It reflects the share of short-term liabilities that the company can quickly repay at the expense of the currently available funds. It is calculated as the ratio of indicator A1 to the sum of P1 and P2. A high value of this ratio indicates that the company will pay off its debts with a high degree of probability.

The next coefficient is the amount of current liquidity. It demonstrates how short-term liabilities of a company are covered by its current assets. The indicator is considered as follows: current assets (3 + 2 + 1) are divided by short-term liabilities (1 + 2). The higher this indicator, the greater the confidence of creditors that the obligations will be repaid.

Finally, an indicator of quick liquidity is, in fact, an intermediate value. It helps to evaluate how the company will settle its obligations (short-term) in the case when it is not possible to sell inventory.

The given liquidity ratios are calculated not only for the internal goals of the enterprise, but also for external users.

Quick liquidity calculation

The quick ratio is calculated as follows: the sum of A1 and A2 is divided by the sum of P1 and P2. That is, put in the numerator: cash + financial investments (short-term) + receivables. The denominator will be the sum of short-term borrowed funds, accounts payable and other obligations.

Using the line code for the balance sheet, the formula for quick ratio looks like this:

Kb = p. 1250 + p. 1240 + p. 1230 / p. 1550 + p. 1520 + p. 1510

We calculate the coefficient on the example of the balance of a fictitious company. Unit of measurement - thousand rubles.

According to the balance sheet, the formula for the quick ratio as of December 31, 2016 will look like this:

Cbl = 2 640 + 45 + 225/1 725 + 3 180 + 37 = 0.58.

In the same way, we calculate the indicator as of December 31, 2015:

Cbl = 1 570 + 14 + 68/1 615 + 1 925 + 20 = 0.46.

The calculation shows that the quick liquidity of the enterprise has increased.

Normative value

In the economic literature, the value of the quick ratio is considered normal in the range of 0.5-1 and above. However, the indicator may vary depending on the industry and the sphere where the company operates. So, for retailers, the figure will be 0.4-0.5.

In the analysis, attention should be paid not only to the general value of the indicator, but also to the structure of its components. Thus, a significant portion of liquid funds may be accounts receivable, which is difficult to collect. In this case, a value higher than one will be considered the fast liquidity rate.

The Russian legislation contains several regulatory values. So, in the Order of the Ministry of Economy of the Russian Federation No. 118 dated 10/18/1997, a quick liquidity ratio of one or higher was recommended, with the explanation that at lower values ​​the company should constantly work with debtors to prevent delays in payment.

In Decree of the Government of the Russian Federation No. 52 dated January 30, 2003, the coefficient for agricultural producers is given from 1.2 to 1.5.

Risk analysis

With the solvency of the company associated with the concept of liquidity risk. It reflects the likelihood that the borrowing company will not be able to fulfill its payment obligations in full and on time.

Liquidity risk assessment is carried out on the basis of the grouping of assets and liabilities already considered above. The higher the risk, the lower the liquidity of the assets and the shorter the payment period for existing obligations. The general table is presented below:

Such a grouping clearly shows the share of liquid assets and liabilities in the overall structure. Next, they compare the values ​​of assets and liabilities within the same risk group. The resulting ratio shows the type of liquidity and the risk zone in which the company is located

So, the balance sheet is considered liquid subject to the following inequalities:

A1≥P1, A2≥P2, A3≥P3, A4≤P4 - it is believed that there are no risks with such ratios.

Liquidity is considered acceptable with the ratio A1 <P1, A2≥P2, A3≥P3, A4 ~ P4. In this case, the risk zone for the enterprise is acceptable.

The ratio A1 <P1, A2 <P2, A3≥P3, A4 ~ P4 is a sign of impaired liquidity. The risk zone is critical.

Finally, with inequalities A1 <P1, A2 <P2, A3 <P3, A4˃P4, liquidity is considered crisis. The risk zone for the enterprise is catastrophic.

conclusions

Liquidity reflects the degree of solvency of the enterprise. When conducting the analysis, various methods are used to obtain a more complete and realistic description of the financial condition of the company.

Using the grouping method make up the analytical balance.

Using the balance sheet data, formulas of quick liquidity ratios, current and absolute liquidity, draw conclusions about the dynamics of changes in assets and liabilities, on the liquidity of balance sheet items, on the compliance of the results with regulatory and industry average indicators.

It is important to note that when analyzing liquidity, the solvency of an enterprise is determined only for the short term (up to 12 months).