Current ratio. What the current ratio shows

Before you start talking about what the current ratio is, you need to determine a number of basic concepts. The sources of the term should also be considered.

Terminology

The adjective "liquid" has Latin roots. Translated, the word means "fluid", "fluid". In other words, it characterizes a certain ease of movement, movement. At the beginning of the 20th century, the word "liquidity" was borrowed from German. In essence, this concept was applied in the banking sector.

General information

The concept of "liquidity" provides the ability of an enterprise’s assets to easily and quickly mobilize. The basic principles for using the term have been reflected in the economic literature. The increased interest in it in the second half of the 20th century was due to the unprofitable activities of the state-owned banks, as well as the formation of commercial financial institutions. Already at the end of the 19th century, leading economists of that time wrote about the importance of observing the correspondence between the terms of performing passive and active operations from the standpoint of liquidity.

Basic concepts

Liquidity should be understood as ease of sale, sale, conversion of material or other values ​​into finance. The funds received are used to cover actual liabilities. In other words, liquidity can be called the ability of an enterprise’s assets to become money easily and quickly, while maintaining its nominal value fixed.

Each organization has its own ability to cover its obligations. The current liquidity ratio shows how ready the company is in time to fulfill the terms of commercial relations on its part. In the process of carrying out activities, the company may have difficulty selling its assets.

In these cases, they talk about the so-called liquidity risk. It is calculated as the difference between the real price of an asset and its probable value. At the same time, commission payments are also taken into account. Liquidity management should be understood as the company's activities in the allocation of its funds, as a result of which assets are converted into money in a short time.

Classification

Assets of the enterprise can be low, high and illiquid. The faster and easier the material value turns into money, the better, of course. The liquidity of any product corresponds to the speed of its sale at face value. No additional discounts are used. The current liquidity ratio in the balance sheet for one or another asset of the enterprise is set for its own. Descending material values ​​can be arranged as follows:

• Finance at the box office and on the accounts of the company.
• Securities (government), bank bills.
• Accounts receivable, loans issued. This also includes corporate securities (bills, shares of companies listed on the stock exchange).
• Stocks of raw materials and goods.
• Equipment and machinery.
• Buildings and buildings.
• Incomplete construction.

Market

The current liquidity ratio shows in this case the number of transactions for the sale of goods traded on a particular trading floor. High numbers indicate that the number of such transactions is sufficient. In this case, the difference in the purchase price (demand price) and sale (offer price) is insignificant.In such a market, each specific transaction does not affect the value of the goods.

Securities

Since it is possible to calculate the current liquidity ratio of the stock market by the number of transactions made, as well as by the size of the spread, the larger the first and the smaller the second, the higher the ability of this platform. The difference between max buy prices and min sell (spread) can be seen in the glass of the trading terminal.

Ways of making transactions

There are two main methods:

• Market. It represents the submission of applications for instant execution at existing prices for demand or supply - the satisfaction of those with the best value.
• Quoted. It is an enterprise issuing its own applications for sale or purchase, indicating preferences for price.

Quoted bids contribute to the formation of instant market liquidity. At the same time, other bidders may at any time sell or buy one or another amount of assets. The whole issue will be the price at which it is possible to carry out the transaction.

The more quoted assets are placed on a traded asset, the higher will be its instant liquidity. Thanks to market orders, other market participants can sell or acquire a certain number of assets at a preferred cost. In this case, the question is the timing of the transaction. The larger the number of market orders, the higher the liquidity of the trading instrument.

Money

As a rule, finance has the highest current liquidity ratio in a particular economic system. However, it is not always possible to quickly exchange money for goods. For example, in accordance with the reserve requirements, the central banks cannot direct all funds into circulation. Reducing or increasing restrictions release or, conversely, freeze the corresponding amount of money.

Bank

When issuing a loan at a financial institution, the amount of money decreases. The more funds issued, the higher the likelihood that there may not be enough assets to return deposits. In the event of a similar situation, they speak of a decrease in bank liquidity. In order to increase it, the company applies the required reserves.

It is also possible to apply to the Central Bank for a temporary loan. It will be considered as additional liquidity. In addition, in such situations, the bank may sell part of its assets. They may be, for example, securities. High liquidity stimulates a financial company to place its funds. Assets can be invested in securities.

Current ratio

Current Ratio is a measure of the company's solvency, its ability to repay valid (up to a year) obligations. The value of the current ratio is widely used by creditors in assessing the real financial condition of a company. In Western economic practice, this concept is also known as working capital ratio. The current liquidity ratio (its standard will be indicated below) reflects the number of rubles of the total asset per ruble of currently existing liabilities.

Logic of calculus

The calculation of current liquidity ratio is carried out in order to reflect the ability of the company to repay current liabilities character. In this case, the existing assets of the firm are important. In other words, if the company's funds exceed the accepted obligations in terms of quantity, then the enterprise is considered (in any case, theoretically) successfully functioning.

The current ratio sets the size of the above difference. The number may vary according to the type of activity or industry. The growth, which is shown by the current liquidity ratio (its formula will be presented below), in dynamics is considered as a very favorable trend.

Calculus method

How to get the current ratio? The formula is presented as the ratio of current assets to current short-term liabilities:

Ctl = OA / KO

The numerator should be taken from the asset, and the denominator, respectively, from the liability of the accounting article. This calculates the current ratio. The normative value (in many cases the optimal one) is 2 or more. But in world practice for a number of industries another figure can be used. So, the current ratio is used (normative) 1.5. With a reduced figure (less than 1), there are likely difficulties in paying off obligations by the enterprise. But at the same time, it is necessary to look at the financial flow of the company's operations.

In some cases, a low current ratio is justified. For example, in retail chains or fast food chains, the reduced figures are offset by a powerful cash flow. According to economists, a high current ratio is also not very welcome. This may mean short-term financing or insufficiently effective use of current assets in the enterprise. Nevertheless, lenders still give preference to companies with high rates, reflecting the more stable position of organizations in the market.

Other numbers

A similar current ratio is an indicator of intermediate (quick) liquidity. However, the calculation of the latter is carried out in accordance with a narrower range of assets. In this case, the least liquid part of the funds — inventories — is not involved in the calculations. The calculus has its own logic.

It consists not only in significantly less liquidity in reserves. It is also important in this case that the money that can be obtained in the process of the forced sale of enterprise resources may amount to less than was spent on their acquisition. So, for example, in the framework of a market economy, a situation is quite typical when during the liquidation of an enterprise the revenue is less than 40% of the book price of stocks. The coefficient under consideration, in accordance with information from Western publications, is 1. However, this figure is considered conditional. In the process of analyzing the dynamics of the coefficient, it is necessary to take into account all factors that influenced its changes.

Location of enterprise assets

Since the calculation of the current liquidity ratio is carried out on the balance sheet, it is necessary to mention the respective groups. Assets are arranged in descending order. The list is as follows:

• A1. Highly liquid assets. These include short-term investments and cash.
• A2. Marketable assets. This includes short-term receivables, payments of which are expected throughout the year after the end of the reporting period.
• A3. Slow-moving assets. These include other funds not listed above.
• A4. Hard to sell assets. This includes all non-current active funds.

Liabilities arrangement

In this group, the elements are arranged according to the degree of increase in the periods of repayment of obligations. The list is as follows:

• P1. The most urgent obligations. This group should include borrowed funds. This, in particular, accounts payable to contractors and suppliers, the budget, personnel, etc.
• P2. Medium term commitments. These include short-term loans and credits, reserves for future expenses and others.
• P3. Long-term liabilities. They are included in the IV section of the balance sheet.
• P4. Liabilities are constant. These include the equity of the enterprise.

When determining the liquidity of the balance sheet, it is necessary to compare the results for each category of liabilities and assets. An ideal option is one that satisfies the following ratio:

• A4
• A3> P3;
• A2> P2;
• A1> P1.