Assessment of financial performance is carried out by each enterprise. This allows you to determine the positive and negative aspects of the organization of production activities. One of the important indicators of financial analysis is liquidity. This is a ratio that can characterize working capital. Based on it, conclusions are drawn about the solvency of the company, its stability. The essence and methods of calculating this indicator will be discussed later.
General definition
Liquidity is an indicator that characterizes the presence of cash and other own resources at the enterprise, which can be converted into cash in a short time and pay off debts. This concept applies to various economic categories, for example, balance sheet, property, enterprise, etc.
Each company owns its own and borrowed funds. The first type of capital includes various property. It is characterized by different market values and speed of implementation. The faster you can sell an asset, the more liquid it is. Moreover, its price should be as close as possible to the market level.
The most liquid are money. Securities are slightly inferior to them. However, it is also a liquid asset. It may also be receivables and other property. Liquidity assessment is carried out on the basis of the balance sheet. This allows you to draw certain conclusions about the state of the enterprise, its solvency and the possibility of future development.
Types of assets
Liquidity ratios are calculated for different groups of balance sheet assets. They fall into three categories. The company must have highly liquid assets. These include money, bank deposits, deposits, stocks, foreign currency, stocks and securities issued by the state. Such values can be realized quickly, in just a few hours.
Medium-liquid assets represent capital, which is formed by accounts receivable, finished products. This property category does not include doubtful and uncollectible receivables. Such assets can be converted into cash within 1-6 months. During this time, their cost will not significantly decrease.
Low liquid assets are machinery and equipment that are morally obsolete. This also includes overdue receivables. This category includes property that can only be sold at market value over a long period of time. Moreover, it is worth noting that the liquidity assessment is carried out for each balance sheet item separately. The same unit of property of different enterprises may differ in different degrees of liquidity.
Asset liquidity features
Liquidity is an indicator that can be estimated relatively arbitrarily. One and the same type of asset may differ in different speed of sale. So, for example, the shares of a successful company are sold in minutes, almost instantly. But the same securities of a new, little-known company will be sold for an indefinite time. This process can drag on for months.
During the trading process, the value of an asset may decline. Therefore, it is important to sell it faster. Otherwise, it gradually depreciates. Shares of a little-known company may be on sale for several months. During this time, they will lose about 30% of their original value. Therefore, companies are interested in their assets being liquid.
Elite cottage in the country will be low liquid. It is expensive, for a comfortable stay in it requires a car. Also, not all buyers can afford such a house. Implementing it will be difficult. But the two-room standard apartment is sold in just a few days. Its cost is relatively small. Moreover, the circle of buyers of such real estate is wide. Therefore, to determine the liquidity approach individually.
Profitability and solvency
The calculation of the liquidity balance is carried out in order to determine the structure of the company’s funds. Based on the data obtained, conclusions are drawn about whether the company will be able to pay its debts, and also stay afloat even in adverse conditions. The higher the liquidity, the higher the solvency.
If a company has enough funds to pay off current debts, it can be considered financially sound. The risk of default on creditors is significantly reduced. This allows you to attract third-party resources for the development of your business, financing of turnover.
However, profitability and liquidity are not related. A company may have equipment on its balance sheet that is difficult to sell if necessary. However, her income can remain stably high, covering existing costs. If liquidity is high and the company's profitability is low, then the funds are used inefficiently. The company has enough resources to maintain stable operation, but the decisions of managers lead to the fact that they are used irrationally.
Assets
The balance sheet liquidity is determined by a special technique. The data for the study are taken in the financial statements for several periods. This allows you to evaluate changes in the dynamics. Information for the calculation is in the balance sheet of the enterprise. It is customary to break it into 4 groups.
The first category (A1) includes cash. These are the most liquid assets. The second category (A2) includes quick liquid assets. This is a receivable. Its maturity is no more than 12 months. Doubtful debt of debtors is excluded from this category.
The third group (A3) included slowly liquid resources. These are doubtful or overdue receivables, inventories, work in progress. Hard liquid assets (A4) are non-current assets. This equipment, buildings and structures. They have a specific purpose and high cost. Therefore, it will be much more difficult to sell them than previous categories of property.
Balance
Since the data for the calculations are taken from the financial statements, they need to be considered comprehensively. The balance consists of two parts. Liabilities reflect financial resources. These are the sources where the company received its capital from. The asset also includes articles on which these resources have been spent. Therefore, these two sides of the balance coincide. These are two sides of the same coin.
The liquidity ratio of the balance sheet is calculated in accordance with its structure. Balance categories from A1 to A4 are compared with liabilities. In this part of the balance sheet, a grouping of funding sources by maturity is also carried out. The fastest way is to settle current liabilities to creditors. This is group P1. The second category (P2) includes loans whose repayment period does not exceed one year.
The third group includes long-term liabilities (P3). They can be repaid after a few years. The fourth category (P4) includes equity. He does not need repayment at all. An enterprise will be liquidated if inequality persists when comparing groups:
A1> P1
A2> P2
A3> P3
A4 <P4.
This is a simple rule that the analyst must evaluate. If violations are identified, the cause of this phenomenon is established.
Current liquidity
It is also called general and characterizes the speed of implementation of the entire amount of current assets of the organization. This is the most common indicator. It shows whether the company is ready to pay off current debts that arise during one period. This formula looks like this:
TL = fixed assets / KZ, where fixed assets - current assets (average value for the beginning and end of the period), KZ - short-term loans (liabilities that need to be settled for one year).
Since the calculation is carried out according to the financial statements, the formula will look like this:
TL = (p. 1231 + ... + p. 1260) / p. 1500
This indicator allows you to look at the situation in general. Trends Which developed in it, must be considered separately. There are techniques that allow you to evaluate liquidity from a different perspective. It is divided into separate categories.
Normative
Coefficient tech. liquidity is compared with the norm. It is determined for each industry separately. For most enterprises, this indicator should be in the range of 1.5-2.5. This is the optimal value, which shows that the company has enough funds to cover its current obligations.
If, during the analysis, it was found that the current liquidity ratio fell below 1.5, this indicates an insufficient number of liquid assets. When the need arises, the company will not be able to fully settle its debts. It is necessary to pay attention to reducing the amount of debt and increasing the number of current assets.
With a significant excess of the indicator of the stopped value, we can talk about the inappropriate use of resources by the company. She has a lot of own funds in circulation. In this case, the company does not effectively use borrowed capital. She does not expand her business, does not work more harmoniously.
Quick liquidity
There is another formula for the liquidity ratio. It allows you to calculate the number of quickly sold assets in working capital, and also compare them with sources of financing. So, quick liquidity is calculated as follows:
BL = (OS - Inventories) / KZ.
Calculation of the balance sheet will look pretty simple. To do this, do the following:
BL = (s.1200 - 1210) / s.1500.
This formula allows you to estimate the number of the most quickly sold assets, and also compare them with the current obligations of the organization. This indicator also has a standard. It must not be less than 1.
Deciphering the result
The liquidity formula allows us to conclude on the status of quickly traded assets, as well as their ability to cover debt. If this indicator decreases to the level of 0.7, this will indicate a decrease in the company's ability to pay with its creditors for using their funds.
It is also worth noting that with a shortage of liquid assets, the company will not be able to take a loan on favorable terms. As the risk of investors and borrowers increases, the cost of using their capital also increases.
If the indicator is more than 1, this is a positive characteristic of the organization. This indicates an increase in solvency. The company receives a high credit rating. She can easily settle her obligations.
Most liquid funds
Absolute liquidity is an indicator that characterizes the ability of an enterprise to repay part of its credit debt in the shortest possible time. They take into account all the money of the company, which is currently in cash or non-cash.
This indicator reflects the portion of credit debt that can be repaid from the most liquid resources. This indicator is rarely used in practice. Many companies do not store their resources in cash or non-cash. They are put into circulation. Money is rarely needed urgently, because when you conclude a contract, the debt repayment period is indicated.
Calculation and standard
The presented liquidity balance formula can be calculated by a bank to determine the solvency of a company that wants to take a loan. The indicator is calculated as follows:
AL = DS / KZ, where DS - cash (cash, non-cash) funds.
According to the balance, the calculation looks like this:
AL = s. 1250 / s. 1500
The standard is 0.2. The company will not be able to pay off part of the debt instantly if the indicator is less than the established limit. When it exceeds the norm, we can talk about the irrational structure of capital. The funds are not involved in the production activities of the company.
Having examined the main features of the presented indicators, it can be noted that liquidity is one of the most important indicators that is used in the course of a financial analysis of an enterprise.