General liquidity ratio and other criteria for assessing the liquidity of the firm

Diagnosis of the financial condition of the enterprise is a very important part of financial management. To identify problems firms need to perform a number of indicators to assess the current situation. The calculation shall be the financial stability and liquidity, and profitability levels and the rate of turnover of various resources of the company.

Analysis of liquidity can be produced using only balance sheets, which means simplicity and accessibility of this kind of analysis even for not very experienced financial managers. To conclude the liquidity of the balance sheet after balance sheet liquidity. To assess the liquidity of the company as a whole, it is necessary to calculate liquidity ratios. Let's look at them in more detail.

The First factor – this is a General indicator of liquidity. His calculation is in relation to the total amount of circulating assets of the company to the value of short-term debt, which are contained in the fifth section of the balance sheet. Total liquidity ratio shows the ability of the enterprise to repay existing most urgent debts by sending to these goals, all current assets, which, of course, much liquid non-current. In the economic literature you can find the names “the current liquidity ratio" or "common ratio" but they mean the same thing.

For this indicator there are values that are considered normal. The lower boundary is set to 1, which determines the requirement of liquidity. In other words, current assets should be enough to cover short-term obligations. If the total liquidity exceeds the value 2, it means that the enterprise is pursuing ineffective policies of management of circulating assets.

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The above range of values is common but may not meet the needs and characteristics of any particular company. For more correct definition of the norm is necessary to make the following calculation: divide the sum of the standard of the reserves and the value of short-term liabilities by the same amount in short-term liabilities. Calculated target total liquidity ratio takes into account the fact that under the direction of the current assets to satisfy the claims of creditors of the company will remain the required minimum reserves to continue activities.

Other liquidity ratios are calculated by using only the more liquid assets. For example, when calculating the intermediate coverage ratio excluded from the calculation of the stocks that are least liquid asset. This figure must also be greater than one, and on top of it, obviously, is limited to the total coverage ratio.

In the numerator of the fraction in the formula of absolute liquidity ratio contains only the most liquid assets-short-term investments and money. He estimates the value of the term debt that the company can recover the liquid assets. In percentage, this value must be in range from 20 to 25. However, for the modern Russian enterprises, this level is often elusive.

Among other things it is possible to calculate the amount of liquidity in the mobilization of reserves. Thus will be concluded, how much short-term obligations, the company will repay if you sell all your stocks. It is considered that this proportion should be from one-half to 70%.

If any metrics fall outside of normal boundaries, then the financial Manager should make decisions that will improve the situation.