Absolute liquidity ratio - the most important indicator of the company's solvency

The overwhelming majority of enterprises in the course of carrying out their activities are faced with the fact that they have certain debts to credit institutions, suppliers, the state and other entities. Part of this debt is long-term, usually it is long-term loans. However, short-term debt is much more often generated, which the company must repay in the near future. Obviously, an organization should have the means to do this, and it should be enough. To assess this situation, that is, the availability and adequacy of a certain property to cover urgent debts, assess the liquidity of the enterprise. Most often, a series of coefficients are calculated for the analysis. We will consider the absolute liquidity ratio more closely, but we will dwell on the remaining indicators in less detail.

The coefficient of absolute liquidity characterizes the degree to which the company's outstanding debt is covered by the most liquid assets. In other words, the indicator in question indicates how much the firm will be able to repay immediately. In the general case, the liquidity indicator is determined by the quotient from the division of liquid assets into short-term liabilities. If we exclude property from the calculation of the liquidity indicator , until absolutely liquid assets are left there , then in the end we will get the absolute liquidity ratio.

The normative value of this indicator can be called very conditional. The fact is that enterprises operating in developed economies must cover about a quarter of their debts due to available money and liquid investments for a short period of time. However, domestic firms of this indicator do not reach almost never, being approximately at the level of 0.1.

It is worthwhile to focus on what property is included in the calculation of the coefficient. With money everything is clear, they will in any case be absolutely liquid. As for financial investments, not everything is so obvious. For some reasons, these or other investments may not be completely liquid, which means that they can not be included in the calculation of the ratio, since the company will not be able to return urgent debts with them.

This coefficient is of extremely important practical importance. The fact is that he connects short-term obligations with each other and precisely that property, through which these liabilities will be covered. In other words, lack of money in the most direct way testifies to problems of solvency of the enterprise. In addition, many banks take into account the absolute liquidity ratio when making a decision to grant a loan, which may be significant for the organization.

If an enterprise has a lack of liquidity, then it has to raise funds. At the same time, mobilization means the realization of the formed reserves. Of course, this is quite an extreme measure, but if we have to resort to it, it will be advisable to calculate the liquidity ratio at mobilization in order to estimate the share of debt that will be repaid during this operation.

We also note the fact that in the analysis of liquidity , the indicators of the general and intermediate coverage are also calculated. The first characterizes the security of fixed-term liabilities with circulating assets, and the second - with the same assets, but excluding stocks.

It is not enough simply to calculate some liquidity ratios. It is necessary to determine all the above-mentioned indicators, and if possible for several years, and then analyze the dynamics. Even if the coefficients are at a normal level, but have negative dynamics, then this is an occasion to think about stabilizing the financial situation.