One of the indicators of the company is the liquidity level. It assesses the creditworthiness of the organization, its ability in full and is calculated on obligations on time. In more detail about what liquidity ratios exist, the formulas for the new balance sheet for calculating each indicator are presented in the article below.
Essence
Liquidity is the degree to which liabilities are covered by the assets of the company. The latter are divided into groups depending on the period of conversion into cash . On this indicator is estimated:
- the company's ability to respond quickly to financial problems;
- ability to increase assets with increasing sales;
- the ability to repay debts.
Degree of liquidity
Lack of liquidity is expressed in the absence of the ability to pay debts and commitments. You have to sell fixed assets, and in the worst case, to liquidate the organization. The deterioration of the financial situation is expressed in a decrease in profitability, loss of capital investments by owners, delayed payment of interest and part of the principal loan debt.
The quick liquidity ratio (the formula for the balance sheet for calculation will be presented later) reflects the ability of an economic entity to repay debt using available funds in accounts. Current solvency may affect relationships with customers and suppliers. If the company is not able to repay the debt on time, its continued existence is in doubt.
Any liquidity ratio (the formula for the balance sheet for calculation will be presented later) is determined by the ratio of assets and liabilities of the organization. These indicators are divided into four groups. In the same way, any liquidity ratio (the balance formula for calculating is needed for the analysis of activities) can be determined separately by quickly and slowly sold assets and liabilities.
Assets
Liquidity - is the ability of the property of the enterprise to bring a certain income. The speed of this process just reflects the liquidity ratio. The balance sheet formula for calculations will be presented below. The larger it is, the better the enterprise "stands on its feet."
We rank the assets by the speed of their conversion into cash:
- money in accounts and at the box office;
- bills of exchange, treasury securities;
- unpaid debts to suppliers, loans issued, securities of other enterprises;
- stocks;
- equipment;
- facilities;
- WIP.
Now we will distribute the assets into groups:
- A1 (the most liquid): funds on hand and in bank accounts, shares of other enterprises.
- A2 (fast-selling): short-term debt of counterparties.
- A3 (slow-moving): stocks, cash flow, long-term financial investments.
- A4 (difficult to sell) - non-current assets.
A specific asset belongs to a particular group depending on the degree of use. For example, for a machine-building plant, a lathe will be referred to as “inventories”, and an assembly specially made for the exhibition will be classified as non-current assets with a useful life of several years.
Liabilities
The liquidity ratio, the formula for the balance sheet of which is presented below, is determined by the ratio of assets to liabilities. The latter are also divided into groups:
- P1 - the most requested obligations.
- P2 - loans with a term of up to 12 months.
- P3 - other long-term loans.
- P4 - reserves of the enterprise
The lines of each of the listed groups must coincide with the degree of liquidity of the assets. Therefore, before making calculations, it is desirable to modernize the financial statements.
Balance sheet liquidity
For further calculations, you need to compare the monetary values of the groups. In this case, the following relations should be satisfied:
- A1> P1.
- A2> P2.
- A3> P3.
- A4 <P4.
If the first three of the above conditions are met, then the fourth will be performed automatically. However, a shortage of funds for one of the groups of assets cannot be compensated for by an overabundance of the other, since quick-sale funds cannot replace slow-moving assets.
In order to conduct a comprehensive assessment, the total liquidity ratio is calculated. Balance formula:
L1 = (A1 + (1/2) * 2 + (1/3) * 3) / (1 + (1/2) * 2 + (1/3) * 3).
The optimal value is 1 or more.
The information presented in this way does not abound in detail. A more detailed calculation of solvency is carried out by a group of indicators.
Current liquidity
The ability of a business entity to repay short-term liabilities at the expense of all assets shows the current ratio. Balance formula (line numbers):
Ktl = (1200 - 1230 - 1220) / (1500 - 1550 - 1530).
There is also another algorithm by which the current liquidity ratio can be calculated. Balance formula:
K = (OA - long-term DZ - indebtedness of the founders) / (short obligation) = (A1 + A2 + A3) / (Π1 + Π2).
The higher the value of the indicator, the better solvency. Its normative values are calculated for each industry, but on average they fluctuate between 1.49 and 2.49. A value of less than 0.99 indicates the inability of the enterprise to pay on time, and more than 3 indicates a high proportion of unused assets.
The ratio reflects the solvency of the organization, not only at the current moment, but also in emergency circumstances. However, it does not always provide a complete picture. At trade enterprises, the value of the indicator is less than the normative, and at production - most often more.
Quick liquidity
The ability of a business entity to repay liabilities at the expense of quick-sale assets minus inventories reflects the quick ratio. Balance formula (line numbers):
Ksl = (1230 + 1240 + 1250) / (1500 - 1550 - 1530).
Or:
K = (short term DZ + short term investment + DS) / (short term loans) = (A1 + A2) / (Π1 + Π2).
In calculating this coefficient, as well as the previous one, stocks are not taken into account. From an economic point of view, the sale of this group of assets will bring the company the most losses.
The optimal value is 1.5, the minimum is 0.8. This indicator reflects the proportion of liabilities that can be covered by cash receipts from current activities. To increase the value of this indicator, one should increase the volume of own funds and attract long-term loans.
As in the previous case, the value of the indicator greater than 3 indicates an irrationally organized capital structure, which is caused by the slow inventory turnover and the growth of receivables.
Absolute liquidity
The ability of a business entity to repay debt at the expense of cash reflects the absolute liquidity ratio. Balance formula (line numbers):
Cal = (240 + 250) / (500 - 550 - 530).
The optimal value is more than 0.2, the minimum is 0.1. It shows that the organization can pay off 20% of urgent obligations immediately. Despite the purely theoretical probability of the need for urgent repayment of all loans, it is necessary to be able to calculate and analyze the absolute liquidity ratio. Balance formula:
K = (short financial investments + DS) / (short loans) = A1 / (Π1 + Π2).
The critical liquidity ratio is also used in the calculations. Balance formula:
Ccl = (A1 + A2) / (P1 + P2).
Other indicators
Maneuverability of capital: A3 / (AO - A4) - (P1 + P2).
Its decrease in dynamics is considered as a positive factor, since part of the funds frozen in inventories and receivables is freed.
The proportion of assets in the balance sheet: (balance sheet total - A4) / balance sheet total.
Security with own funds: (P4 - A4) / (AO - A4).
The organization must have at least 10% of its own sources of financing in the capital structure.
Net working capital
This indicator reflects the difference between current assets and loans, accounts payable. This is the part of capital that is formed from long-term loans and equity. The formula for the calculation is:
Net capital = OA - short-term loans = p. 1200 - p. 1500
The excess of current assets over liabilities indicates that the company is able to pay off debts and has reserves for expanding its activities. The standard value is greater than zero. The lack of working capital indicates the inability of the organization to repay liabilities, and a significant excess indicates the irrational use of funds.
Example
On the balance sheet of the company are:
- Cash (DS) - 60 000 rubles.
- Short-term investments (KFV) - 27 000 rubles.
- Accounts receivable (DZ) - 120 000 rubles.
- OS - 265 thousand rubles.
- NMA - 34 thousand rubles.
- Inventories (PZ) - 158 000 rubles.
- Long-term loans (KZ) - 105 000 rubles.
- Short-term loan (CC) - 94,000 rubles.
- Long-term loans - 180 thousand rubles.
It is necessary to calculate the absolute liquidity ratio. Calculation formula:
Cal = (60 + 27) / (105 + 94) = 0.4372.
The optimal value is more than 0.2. The company is able to pay 43% of the obligations at the expense of funds in the bank account.
We calculate the ratio of urgent liquidity. Balance formula:
Ksl = (50 + 27 + 120) / (105 + 94) = 1.09.
The minimum value of the indicator is 0.80. If the company utilizes all available funds, including debt of debtors, this amount will be 1.09 times more than the existing obligations.
We calculate the critical liquidity ratio. Balance formula:
Ccl = (50 + 27 + 120 + 158) / (105 + 94) = 1.628.
Interpretation of the results
The coefficients themselves do not carry a semantic load, but in the context of time intervals they describe in detail the activities of the enterprise. Especially if they are supplemented by other calculated indicators and a more detailed examination of the assets that are taken into account in a particular balance sheet line.
Illiquid stocks cannot be quickly sold or used in production. They should not be taken into account in calculating current liquidity.
In an organization that is part of a holding group, the indicators of internal receivables and payables are not taken into account when calculating the liquidity ratio. The solvency level is best determined according to the absolute liquidity ratio.
Overvaluation of assets will cause many problems. The inclusion in the calculations of recovery of unlikely debt leads to an incorrect (reduced) assessment of solvency, obtaining inaccurate data on the financial position of the organization.
On the other hand, when excluding assets from the calculations, the probability of which income is not high, it is difficult to achieve the standard values of liquidity indicators.