The liquidity ratios and solvency

Before go to the consideration of the term “liquidity ratios" you must understand what is meant by the term liquidity. The notion of liquidity refers to the economic terminology. It means the ability to assets quickly converted to cash. In other words, liquidity – the negotiability of money. The liquidity ratios and solvency are of particular importance to determine the financial stability of any organization, including a commercial Bank.

It Should be noted that the term liquidity the term "liquidity ratio", despite the consonance have a different meaning. Under the liquidity refers to the ability to convert to cash or cash equivalents to repay financial liabilities. Particular importance is given to the speed of such a transformation.

Since liquidity determines the stability of the enterprise as a whole, the figure is primarily interested in investors, business owners, executives, etc.

The Term "low liquidity"  can speak not only about the time of the conversion of the asset, but also about the level of losses that are associated with this transformation. For example, specific  property, plant and equipment, with nominal value of 1 million within a month you can turn in only 700 thousand in real cash.

Liquidity Ratios  represent values, which are used in assessing the organization's ability to repay existing obligations with available company assets.  

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Based on the fact that the assets are characterized by different degree of liquidity, and the liabilities are characterized by different terms of enterprise performance obligations. Therefore, the liquidity ratios allow to estimate numerically the ratios are the same through the term of the obligations to the realization of assets and liabilities.

Consider the liquidity ratios used in the enterprise.

Current Ratio In other words, the coverage ratio. It is a financial ratio expressed by the ratio of current assets to current liabilities (current liabilities).  It reflects the organization's ability to pay its debt obligations in the period of duration of the production cycle. The quick ratio  is a financial ratio equal to the ratio of highly liquid current assets to current liabilities. It reflects the organization's ability to pay its debt obligations in the period of duration of the production cycle in the event of difficulties with the sale of finished products or commodities.

Absolute liquidity Ratio is a financial ratio equal to the ratio of short-term financial investments and cash assets over current liabilities.

It is Worth noting that the Bank calculate the following key ratios liquidity: instant liquidity, liquidity on fixed-term obli­the States and the General liquidity ratio fixed-term obligations.

For most large banks of valid and critical factors of Bank liquidity is difficult to establish, because the process for reflecting liquid­ness in them, differ somewhat from the conventional model. Thus, for such banks the coefficients are more of a reference.

Overall, the liquidity ratios and the solvency of any company reflect a nominal value potential of the company to cover current debt available circulating assets. The definition of these coefficients.  related to Fund accounting and accounting operations.