How does the absolute liquidity ratio show the level of solvency

When analyzing the economic activity of an enterprise, much attention is paid to the indicators of liquidity. This is due to the fact that liquidity reflects the level of solvency and the availability of a certain amount of funds that can be used for current settlements with suppliers and contractors. There are several indicators by which liquidity is estimated, to which one can include the absolute liquidity ratio. The values of this indicator are used in analytical summaries, compiled on the basis of the annual assessment of balance data.

A variety of liquidity ratios is calculated by the ratio of assets with the highest degree of liquidity to the company's current liabilities. This economic indicator characterizes the size of the company's short-term debt, which it can repay in the near future. When the absolute liquidity ratio shows a result in the range from 0.2 to 0.25, such a value is usually considered normal.

Analysis of solvency and liquidity balance is often used to consider the possibility of concluding contracts with prospective partner companies in the short term. If we estimate the overall liquidity ratio of the balance sheet in the short term, for example, over the time interval in the last three years of operation, we can see how stable the company is, how the size of its liquid assets has changed . On the basis of such data, it is usually decided whether to work with the supplier.

Large companies today are characterized by a greater share of highly liquid assets reflected in the balance sheet. From another perspective, the absolute liquidity ratio shows the ratio of cash, financial resources and their equivalents to the organization's debt for a particular period of time under consideration. To understand what the liquidity indicators of an enterprise are, you need to understand what the concept of "liquidity" in the general sense implies.

So, in the economic literature, liquidity is the ability of a company to pay its short-term obligations on time. When an enterprise has the ability to realize its current assets as quickly as possible and thereby pay off its debts, it can be considered liquid. In order to keep the liquidity ratio absolute at the proper level, it is necessary to have at the cash desk the balance of free financial resources, which, if necessary, can be directed for the intended purpose. This is due to the fact that, as a rule, fixed assets purchased not for resale purposes, can not be sources of debt repayment. Of the entire group of assets, the most liquid type is considered to be circulating assets, in particular, money supply, short-term financial loans or receivables that are not yet overdue, but the maturity date has already come. Debt, the payment deadline, as well as other stocks at all desire can not be attributed to highly liquid assets. The absolute liquidity ratio shows how a company can be solvent in the short term. The formula for calculating such an indicator of absolute liquidity is expressed in terms of the amount of cash and operationally traded securities, divided by short-term liabilities.

From the accounting point of view, the absolute liquidity ratio shows the amount of the debt in the context of the current period, which it will be possible to repay at the time when the balance sheet is compiled. When calculating the coefficient, the data of the 2nd and 4th sections of the balance are taken as a basis.