Liquidity is one of the indicators of solvency of an enterprise. There are three types of liquidity: current, fast, instant. Next, consider what these indicators are talking about, how they are calculated.
The total liquidity ratio explains how quickly the organization is able to pay off current liabilities. This indicator gives an estimate of approximately how many rubles of assets account for the ruble of current liabilities. Each enterprise repays short-term payments, mainly, with current assets. Thus, if the total liquidity ratio is more than 1, then the organization repays current payments in full with current assets, and its activity is efficient. It is current assets that save the organization in the event of any unforeseen situations that cause expenses. The liquidity indicator can be applied not only to a specific enterprise, but also to precious metals, securities, real estate, equipment, etc.
The formula by which the coefficient is determined: (the sum of current assets, receivables and contributions of the founders for contributions) / current liabilities.
A high total liquidity ratio helps the organization to receive short-term loans, as lenders are sure to look at this indicator. If it is high enough, then the company has a lower risk of making payment arrears or not giving the money to the creditor at all. In the case where the total liquidity ratio is low (less than 1), the organization has difficulty repaying current liabilities. It follows that financiers need to analyze the cash flow of the organization. So, for example, for fast food enterprises, retailers, a large cash turnover is characteristic. And the overall liquidity ratio will be low. If this ratio is too high, it means that the enterprise does not use current assets efficiently, as well as short-term financing. Although lenders regard the great importance of the liquidity ratio as a stable position of the enterprise in the market.
Quick ratio shows the degree of financial stability of the enterprise in terms of short-term period. They also call it the coefficients of strict liquidity, urgent liquidity, and intermediate liquidity. This indicator is calculated as: (difference between current assets and stocks) / short-term liabilities.
This indicator is more stringent compared to current liquidity. He indicates the quick solvency of the organization and says how soon its liquid funds can cover short-term debt. It is recommended that this indicator be in the range of 0.7 - 1.5.
The instant liquidity ratio shows how well the organization is able to cover short-term payments with cash. Short-term financial investments are also taken into account here . The coefficient is calculated by the formula: (amount of cash and short-term investments) / current liabilities - (amount of future income, reserves for future payments).
This ratio indicates what proportion of accounts payable can be repaid by the organization immediately. If, when analyzing the activities of the enterprise, the financier receives a coefficient value of more than 0.2, then the company can pay off its own obligations in a short time. In the event that the instant liquidity ratio is below 0.2, the company risks not cope with short-term credit debt.
The financial manager of the organization must constantly analyze the current situation and evaluate the liquidity of the enterprise. This will help in time to take measures to increase its solvency.