A correct economic analysis should be based on a study of all the necessary indicators, otherwise the conclusions obtained will be biased and will not correspond to reality.
When considering financial stability, solvency, as well as investment attractiveness, enterprises must calculate and analyze its liquidity. This is done in order to better understand the ability to fulfill short-term and long-term obligations.
The concept and essence of liquidity
Before you begin to analyze the types, as well as conduct any analysis, it is worth understanding the very concept and essence of the indicator.
Liquidity is the so-called ability of an enterprise to pay off all its obligations within a certain period of time. This means that, having determined this indicator, we can draw conclusions about the possibility of settlements with creditors, tenants and suppliers for the resources that are currently available.
Also often, this concept is understood precisely as the liquidity of the balance sheet. This is not a mistake, since the analysis of the indicator consists precisely in the study of the balance groups, but more on that later.
In order to better understand the question: “Liquidity is what?”, We will figure it out with the following example.
Specific example
There is a working enterprise for the production of plastic bottles. Imagine that he has a loan, as well as an unpaid bill from a plastic supplier. In addition, the company leases an office and production facilities.
In this case, having performed a liquidity analysis, it will be possible to say how quickly the company will be able to pay its suppliers, tenants, creditors and at the expense of which of its assets, if all of them suddenly require immediate payment.
This is what characterizes this indicator.
In other words, liquidity is an indicator that indicates the possible speed of the sale of assets of enterprises of different groups for the speedy repayment of all their obligations.
Asset groups
The liquidity profile is affected by assets that differ in their timing of sale and the possibility of quick sale.
The following groups can be distinguished by assets of the balance sheet of the enterprise:
- Absolutely liquid.
- Quickly implemented.
- Slowly implemented.
- Difficult to implement.
The following groups of liabilities can also be distinguished by liabilities:
- The most urgent.
- Possessing medium urgency.
- Long term.
- Permanent.
Let's consider each group in more detail.
Absolutely liquid assets
This group includes such assets of the enterprise that can be instantly retrieved. For example, these are cash on hand, short-term receivables and others financial investments with a short time.
Such assets are characterized by absolute liquidity. This means that they can be used to repay urgent and current liabilities without losing their value.
Fast-selling assets
These include receivables with a maturity of less than 1 year, and current assets with a short conversion period to cash.
They mean those funds of the enterprise that cannot be instantly converted into money - it takes time. Nevertheless, compared with the following two groups, their implementation period is much shorter.
Slow-moving assets
This group includes long-term receivables (more than one year), stocks of the enterprise in warehouses, value added tax and other assets of the enterprise, the implementation of which requires a sufficiently large amount of time.
Such assets are considered to be low liquid.
Hard-to-sell assets
This group has collected assets, the implementation period of which is very long. These include all non-current assets of the enterprise: fixed assets, long-term financial investments, etc.
Typically, such assets are not involved in one production turnover, but in several.The loss of such resources threatens the company with a halt in production or bankruptcy.
Next, we proceed to consider the grouping of reserves by degree of liquidity.
The most urgent obligations
This group includes such liabilities that need to be repaid in a period of up to three months. This is payables, which can act as debt for goods or services.
There may also be unpaid utility bills, rental property or equipment, but the main thing is that the mandatory repayment period should not exceed three months.
Medium term liabilities
Such liabilities may include short-term loans or loans. The repayment period can be from three to six months.
This group may also include other payables with maturities of up to 6 months.
long term duties
This includes the fourth section of the balance sheet. That is all long term duties, loans and other types of indebtedness of a legal entity to other business entities.
The presence of such debt is a normal condition for the functioning of any enterprise and does not mean the presence of negative solvency.
Standing commitments
We can say that this is the debt of the company to its shareholders. This is the equity of the organization. This includes fixed assets. They will have to be given only at the closure of the enterprise.
After we familiarized ourselves with the above groups, we will consider the method of their analysis and how to calculate the tech coefficient. liquidity, as well as other indicators.
Liquidity analysis
If you figured out groups of assets and liabilities, then you can move on to the principles of analysis of the components of the studied indicator.
The balance sheet liquidity is considered ideal if the following conditions are met:
- The size of absolutely liquid assets is greater than the most urgent obligations.
- The amount of quickly sold assets exceeds the level of liabilities with medium urgency.
- The number of slow-moving assets is greater than long-term liabilities.
- Hard-to-sell assets are less than the permanent obligations of the enterprise.
If not all conditions are met, but only partially, then this may be the first signal that the balance sheet liquidity is not up to the mark.
However, it should be understood that for some industries this deviation is normal. These are, for example, sectors of the economy, which imply the existence of a large amount of property that does not belong to him. In this case, long-term liabilities will always be disproportionately greater than any company assets.
Liquidity ratios
To understand the level of solvency, which is the enterprise, you can use special factors.
The first to consider is the coefficient tech. liquidity.
It is also called the total liquidity ratio. For the calculation it is necessary to use the following formula: Ktekl. = current assets / long-term liabilities.
The coefficient calculated in this way reflects the company's ability to fulfill its current obligations solely at the expense of current assets. Current liquidity is considered good if the indicator is at a level of from 1.5 to 2.5. If the indicator is less, then we can talk about a dangerous financial situation, and if more than 2.5, then this indicates the irrational use of funds.
The instant liquidity ratio is calculated as follows: Km.l. = (current assets - stocks) / long-term liabilities.
In this way, they calculate the possibility of quick settlement with short-term debts due to highly liquid assets, with the exception of reserves. The coefficient value is considered normal from 0.6 to 1.0.
Absolute liquidity ratio can be calculated as follows:= (cash + short-term investments) / current liabilities.
Absolute liquidity of the enterprise will be at a normal level if the ratio is above 0.2. The lower the value, the less solvency a company has.
Conclusion
Carrying out the analysis of liquidity according to the formulas and recommendations mentioned above, it is possible to draw complete and reliable conclusions about the current position of the enterprise in the market, as well as understand and find ways to solve solvency problems.
But do not forget about the need for calculation indicators of financial stability, solvency and others that affect the overall picture, showing the financial protection and investment attractiveness of the company.
