Liquidity is the ability of an enterprise to convert its assets into cash in a timely manner. In other words, it is the rate at which the firm's property is sold at market prices or its ability to turn into money.
Instructions
Step 1
There are highly liquid (cash and short-term financial investments), quickly realizable (urgent accounts receivable), slow realizable (accounts receivable over 12 months and other circulating assets), as well as hard-to-sell (non-current) assets. Their category is determined depending on how quickly and easily you can get their full value for the property.
Step 2
When determining the liquidity of an enterprise, a number of coefficients are used that allow us to conclude how quickly it is able to sell part of the property in order to pay off short-term debt.
Step 3
The current liquidity ratio is calculated as the ratio of current current assets and current liabilities. In this case, current assets are understood as the amount of current assets minus long-term receivables, i.e. payments on which are expected not earlier than in 12 months. This ratio allows us to conclude whether the company is able to pay off its short-term liabilities through the sale of current assets. The standard value of the current liquidity ratio is 2 or more.
Step 4
The quick (urgent) liquidity ratio is defined as the ratio of highly liquid assets to the firm's short-term liabilities. In this case, highly liquid assets are understood as cash in the cash desk of the enterprise and in bank accounts, short-term financial investments, as well as urgent accounts receivable. The normative value of this coefficient is not less than 1. It shows how quickly the company is able to pay off its short-term debts in case of possible difficulties with the sale of finished products.
Step 5
The absolute liquidity ratio is equal to the ratio of cash and short-term financial investments to short-term liabilities of the enterprise. The standard for this ratio is 0, 2. It indicates how quickly the company can settle its current obligations without resorting to selling products and collecting receivables.
Step 6
Based on these ratios, it is possible to draw a conclusion about the liquidity of the enterprise. If they are significantly lower than the standard values, then this indicates that the company cannot settle its current obligations in a timely manner, which means that there is a large financial risk for the lender. The values of the coefficients exceeding the standard may indicate an irrational distribution of the enterprise's capital.
