The liquidity of the enterprise and its main indicators

If you want to get the most accurate assessment of the state of an enterprise from a financial point of view, then you will have to do a lot of work. The financial condition is quite multifaceted, and in order to draw the closest to reality, it is required to determine indicators that characterize financial sustainability, indicators of how well the business is performing, and also those coefficients that describe the liquidity of the enterprise. I would like to pay special attention to the last group of coefficients.

Before considering specific calculation methods, it is worthwhile to say that the liquidity of the enterprise is the ratio and correspondence between the most urgent debt of the enterprise and certain assets that can be directed to its repayment.

Considering the coefficients, we start with the most common of them, which is called an indicator of current liquidity. It reflects the adequacy of the current assets of the enterprise to ensure short-term obligations and is defined as their ratio. Like many other coefficients, this has a normative meaning. It is believed that in an extreme case, the company's urgent debts should be 100% covered by current assets. Thus, from the bottom, the indicator is limited to 1. On the top, the restriction is 2 and is an efficiency requirement. In other words, if the amount of current assets is more than double the short-term liabilities, then we can talk about their excess and inefficient use. These boundaries are very general and may not correspond to the specifics of a particular enterprise or industry. Each firm can calculate its normal level of this coefficient by referring the amount of short-term liabilities and the normalized component of current assets to short-term liabilities. If such a level of the coefficient is observed, the enterprise will be able to continue its activity even if it returns all its urgent debts.

If the least liquid component of current assets - stocks is excluded from the numerator - the indicator is converted into an intermediate liquidity ratio. Its meaning in this case will already be: how much the company will be able to provide all its most urgent obligations with full recovery of accounts receivable. It is purely arithmetically clear that this indicator can not be greater than the previous one. The lower limit is also traditionally set at around 1. When calculating, one should take into account that some stocks can be quite liquid. For example, products that the organization ships on prepayment. This value should also be included in the calculation, and illiquid property should be deducted.

Absolute liquidity of the enterprise is characterized by the same coefficient. It reflects that portion of short-term liabilities that can be repaid by absolutely liquid assets (cash and financial investments equated to them). For developed economies, a share of 20-25 percent is traditionally considered acceptable, but Russian enterprises are at best satisfied with 10 percent for a number of reasons.

In some cases, resort to the calculation of liquidity in the mobilization of funds. Mobilization in this case means the sale of reserves and the direction of the proceeds to repay the urgent debt. Accordingly, the coefficient is defined as the ratio of the amount of reserves to the aggregate amount of short-term liabilities. A normal level is a value of at least 0.5, but not exceeding 0.7.

If one or more coefficients go beyond the limits of norms or have a negative trend, then management should think about how to increase liquidity of the enterprise.