Calculate the quick ratio and other liquidity indicators of the company

The Enterprise is a very complex system, the activities of its multifaceted. However, each of the parties of this activity is in some way to describe to make any conclusions or make certain decisions. Of particular importance for the analysis of the activities of the company are indicators of its financial condition. This condition can also be described from different perspectives, but now I would like to focus on the assessment of liquidity. This assessment can be carried out by examining the liquidity of the balance as possible – by calculating coefficients such as, for example, the quick ratio and the like. These methods are not mutually exclusive, so for complete and accurate analysis it is better to use both. But in this article we will focus on the calculation and analysis of ratios.

Calculation of the group of coefficients is the ratio of liquid assets to the value of short-term liabilities. The first factor characterizes the adequacy of the total value of circulating assets for repayment of term debt. In this regard, the name of the indicator total (current) liquidity. It is obvious that all businesses are different, so the indicators of current ratio they are also different. However, there is a normative value, to which businesses should aspire to. The calculated ratio must not be less than one, but not more than two. The lower limit demands on liquidity and top-performance. In other words, current assets should be sufficient to repay all term debt, but should not be too much, as in this case, they are used insufficiently rationally.

The Following indicator-quick ratio. It is the definition by excluding from the numerator, that is, of the current assets, the least liquid component of-stocks. Therefore, the indicator of "specified" therefore his another name – updated liquidity ratio. Based on the method of calculation, we can conclude that this indicator cannot be more than the previous. This is determined by its upper normal limits. Traditionally the lower boundary is also taken equal to one. The quick ratio can be clarified by the inclusion in the calculation of liquid assets and illiquid exception. Thus, the numerator should take into account the finished goods that will be sold in advance, but you need to deduct illiquid financial investments and doubtful debt.

If the numerator is cleansed of the less liquid assets, and it remains the only absolutely liquid assets, the calculation result will be the absolute liquidity. It gives an indication of the proportion of debt that the organization can repay immediately. For enterprises in Russia, this share in the best case is 10%. In more developed economies, the normal level of this indicator is considered achieved if the fifth part of the term debt the firm can immediately return.

If the company will have to resort to inventories, to generate money to repay debts, in this case it makes sense to calculate the liquidity ratio when raising funds. It is determined by dividing the reserves in the amount of the existing term obligations. This figure must normally be limited to 0.5, but should not be more than 0.7.

After the calculation of these indicators they need to perform. Each of them can be in normal limits, however the financial situation may deteriorate. Such a conclusion can be drawn if, for example, the quick ratio in dynamics for several years moving toward one of the boundaries of the normal range. Any identified negative trend requires intervention and making certain administrative decisions.