Coefficient of liquidity: the formula on balance and normative value

One of the indicators of the firm's activity is the level of liquidity. It assesses the creditworthiness of the organization, its ability in full and calculated on the obligations in time. More details about what liquidity ratios exist , formulas for a new balance sheet for calculating each indicator are presented in the article below.

The Essence

Liquidity is the degree of coverage of liabilities by the firm's assets. The latter are divided into groups, depending on the period of conversion into cash. According to this indicator, it is estimated:

• The firm's ability to respond quickly to financial problems;
• The ability to increase assets with increasing sales volumes;
• The ability to repay debts.

Degrees of liquidity

Insufficient liquidity is expressed in the absence of the ability to pay debts and liabilities. It is necessary to sell fixed assets, and in the worst case - to liquidate the organization. Deterioration of the financial situation is reflected in a decrease in profitability, loss of capital investments of owners, delay in payment of interest and part of the principal debt on the loan.

The coefficient of urgent liquidity (the formula for the balance for the calculation will be presented later) reflects the ability of the business entity to pay off the debt from the available funds in the accounts. Current solvency can affect the relationship with customers and suppliers. If the enterprise is not able to repay the debt on time, its continued existence raises doubts.

Any liquidity ratio (the formula for the balance sheet for the calculation will be presented later) is determined by the ratio of assets and liabilities of the organization. These indicators are divided into four groups. Similarly, any liquidity ratio (a formula for the balance for calculation is needed for the analysis of activities) can be determined separately for quickly and slowly realizable assets and liabilities.

Assets

Liquidity is the ability of an enterprise's property to generate a certain income. The speed of this process just reflects the liquidity ratio. The formula for the balance for the calculations will be presented later. The more it is, the better the enterprise "stands on its feet".

We will rank assets by the speed of their conversion into cash:

• Money on accounts and at the box office;
• Bills of exchange, treasury securities;
• Outstanding debts to suppliers, loans issued, securities of other enterprises;
• Stocks;
• equipment;
• Constructions;
• WIP.

Now we divide the assets into groups:

• A1 (the most liquid): funds in cash and on the account in the bank, shares of other enterprises.

• A2 (quickly sold): short-term debt of counterparties.

• А3 (slowly sold): stocks, WIP, long-term investments.

• A4 (hard to sell) - non-current assets.

A particular asset is assigned to one or the other group, depending on the degree of use. For example, for a machine-building plant, the lathe will refer to "commodity stocks", and an assembly made specifically for the exhibition - to non-current assets with a useful life of several years.

Liabilities

The liquidity ratio, the formula for the balance of which is presented below, is determined by the ratio of assets to liabilities. The latter are also divided into groups:

• P1 - the most demanded obligations.
• P2 - loans with a validity of up to 12 months.
• P3 - other long-term loans.
• P4 - reserves of the enterprise

The lines of each of the listed groups should coincide with the level of liquidity of assets. Therefore, before carrying out the calculations, it is desirable to modernize the financial statements.

Liquidity of the balance sheet

For further calculations it is necessary to compare the monetary estimates of the groups. In this case, the following relations must be satisfied:

• A1> П1.
• A2> Π2.
• A3> П3.
• A4 <П4.

If the first three of the above conditions are met, then the fourth one will be executed automatically. However, the lack of funds for one of the groups of assets can not be compensated for by an overabundance for another, since quick-sellers can not replace slow-moving assets.

In order to conduct a comprehensive assessment, the total liquidity ratio is calculated . Formula by balance:

L1 = (A1 + (1/2) * A2 + (1/3) * A3) / (П1 + (1/2) * П2 + (1/3) * П3).

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 the business entity to repay short-term liabilities at the expense of all assets shows the current liquidity ratio. Formula by balance (line numbers):

Ktl = (1200 - 1230 - 1220) / (1500 - 1550 - 1530).

There is also another algorithm by which the current liquidity ratio can be calculated. Formula by balance:

K = (OA - long-term DZ - indebtedness of the founders) / (multiple obligation) = (A1 + A2 + A3) / (Π1 + Π2).

The higher the value of the indicator, the better the solvency. Its normative values are calculated for each industry, but on average fluctuate within 1.49-2.49. A value of less than 0.99 indicates the inability of the enterprise to settle on time, and more than 3 - a high proportion of unused assets.

The coefficient reflects the solvency of the organization not only at the current moment, but also in extraordinary circumstances. However, it does not always provide a complete picture. In trade enterprises, the value of the indicator is less than the normative one, while for manufacturing enterprises it is often more.

Urgent liquidity

The ability of an economic entity to repay liabilities at the expense of quick assets, net of inventories, reflects the ratio of the term liquidity. Formula by balance (line numbers):

Ksl = (1230 + 1240 + 1250) / (1500-1550-1530).

Or:

K = (multiple DZ + multiples of finals + DS) / (multiple loans) = (A1 + A2) / (Π1 + Π2).

In calculating this coefficient, like the previous one, reserves are not taken into account. From the economic point of view, the implementation of this group of assets will bring the company most losses.

The optimal value is 1.5, the minimum value is 0.8. This indicator reflects the proportion of liabilities that can be covered from 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 is more than 3, which indicates the irrationally organized capital structure, which is caused by the slow turnover of inventories and the growth of accounts receivable.

Absolute liquidity

The ability of the business entity to repay the debt at the expense of cash reflects the absolute liquidity ratio. Formula by balance (line numbers):

Cal = (240 + 250) / (500-550-530).

The optimal value is more than 0.2, the minimum value is 0.1. It shows that 20% of the organization's urgent obligations can be repaid immediately. Despite the purely theoretical probability of the emergence of the need for urgent repayment of all loans, it is necessary to be able to calculate and analyze the absolute liquidity ratio. Formula by balance:

K = (short-term financials + DS) / (short loans) = A1 / (Π1 + Π2).

The calculations also use the critical liquidity ratio. Formula by balance:

Kkl = (A1 + A2) / (П1 + П2).

Other indicators

Maneuverability of the capital: А3 / (АО - А4) - (П1 + П2).

Its decrease in dynamics is seen as a positive factor, since part of the funds frozen in production stocks and accounts receivable is released.

Share of assets in the balance sheet: (balance total - A4) / balance total.

Provision with own funds: (P4 - A4) / (JSC - 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 working assets and loans, accounts payable. This is the part of the capital that is formed by long-term loans and own funds. The formula for calculation is:

Net capital = OA - short-term loans = p. 1200 - p. 1500

Excess of circulating assets over liabilities testifies that the enterprise is able to repay debts, has reserves for expansion of activity. The normative value is greater than zero. The shortage of working capital indicates the inability of the organization to repay obligations, and a significant excess - about the irrational use of funds.

Example

The balance of the enterprise includes:

• Cash (DS) - 60 000 rubles.
• Short-term investments (КФВ) - 27 000 rub.
• Accounts receivable (ДЗ) - 120 000 rubles.
• OS - 265 thousand rubles.
• NMA - 34 thousand rubles.
• Inventories (PZ) - 158 000 rubles.
• Long-term loans (CZ) - 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 enterprise is able to pay 43% of the liabilities at the expense of funds on the bank account.

Calculate the ratio of liquidity. Formula by balance:

Ks = (50 + 27 + 120) / (105 + 94) = 1.09.

The minimum value of the indicator is 0.80. If the enterprise uses all available means, including debts of debtors, then this amount will be 1.09 times greater than the existing liabilities.

We calculate the critical liquidity ratio. Formula by balance:

Kkl = (50 + 27 + 120 + 158) / (105 + 94) = 1.628.

Interpretation of results

In themselves, the coefficients 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 estimates and a more detailed consideration of assets that are accounted for in a particular line of the balance sheet.

Illiquid stocks can not be quickly realized or used in production. They should not be taken into account when calculating current liquidity.

In an organization that is part of a holding group, the calculation of the liquidity ratio does not take into account the indicators of internal accounts receivable and accounts payable. The level of solvency is better determined by the absolute liquidity ratio.

Many problems will cause an overestimation of assets. Inclusion in the calculation of the collection of unlikely debt leads to an incorrect (reduced) assessment of solvency, obtaining unreliable data on the financial position of the organization.

On the other hand, with the exclusion of assets from the calculation, the probability of obtaining income from which is low, it is difficult to achieve the normative values of liquidity indicators.