Intermediate liquidity ratio and other liquidity ratios of the company.


2020-07-03 02:06:07




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Many enterprises in the implementation of the activities are faced with financial problems. In order to solve them, it is necessary to conduct financial diagnosis and subsequent financial recovery. In the formulation “financial diagnosis" is easiest to use certain financial ratios and indicators. Typically, the analysis is based on the study of financial ratios related to four groups: liquidity ratios, financial soundness indicators and also the levels of profitability and business activity ratios. Let us consider more closely the coefficients characterizing the liquidity of the company.


The First and most common is the indicator, having a very characteristic name – coefficient of General liquidity. With the help of the comparison of working capital at the disposal of the studied firms, and short-term debts, which were formed during the implementation of activities. It is obvious that current assets should fully cover these debts – the requirement of liquidity. On the other hand, there is the requirement of efficiency – it is believed that more than two-fold excess of current assets over liabilities with the shortest term indicates inefficient use of these assets.


However, the normal value of this index for a particular company may differ from the usual. For its determination it is necessary to proceed from the assumption that current assets after repayment of liabilities should be enough for the continuation of activities. In other words, the current assets must be equal to the amount of short-term obligations and the standard of the reserves. Interestingly, this ratio having its borders, is the limiter for another number called the coefficient of intermediate liquidity.


By the relationship of current assets to short-term liabilities as is determined by the ratio of the fast (intermediate) liquidity. However,  in this case, from the current reserves should be excluded the least liquid of them, which are traditionally recognized stocks. Can be formulated in such a way that the intermediate liquidity ratio shows the extent to which the firm will be able to return the most urgent debts when collection of the amount receivable. The lower limit of the indicator is also set at unity.


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The above calculation is simple, but not entirely accurate. The fact that some stocks can be more liquid than short-term investments or, for example, questionable "accounts receivable". Intermediate liquidity ratio is determined more accurately if the calculation to include the cost of products sold prepaid, as to exclude not only non-liquid financial investments, but the accounts receivable in part the repayment is doubtful.


The solvency of the company, that is, its ability to immediately perform calculations on the most urgent obligations, is described by the same coefficient. For its calculation in the numerator leaving only the most liquid assets. Obviously, this will cash and property equal to them. It should be borne in mind that in any case cannot be included in the calculation of illiquid investments, as this will distort the real situation. Russian organizations mostly have this level of not more than 0.1. This level in the Western economies is clearly unacceptable, as it is customary limitation from 0.2 to 0.25 from top to bottom.


In some cases, the company can count as a measure of liquidity in funds mobilization. It is a term that describes what part of the most urgent obligations to repay, if they implemented all the stocks of the company.


For accurate analysis activities it is necessary to calculate not only, for example, intermediate liquidity ratio, but all the others. And also very useful to examine the liquidity dynamics identifying trends.

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Alin Trodden - author of the article, editor
"Hi, I'm Alin Trodden. I write texts, read books, and look for impressions. And I'm not bad at telling you about it. I am always happy to participate in interesting projects."

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