Liquidity ratio

In accounting, the liquidity ratio expresses a company's ability to repay short-term creditors out of its total cash. It is the result of dividing the total cash by short-term borrowings. It shows the number of times short-term liabilities are covered by cash. If the ratio is greater than 1.0, it means fully covered.

The formula is: LR = ⁠liquid assets/short-term liabilities⁠

Variants

Liquidity ratios measure how quickly assets can be turned into cash in order to pay the company's short-term obligations. The following metrics can also be considered to measure the liquidity of a firm.

  • Current ratio measures whether a firm has enough resources to meet its short-term obligations. It is the ratio of a firm's current assets to its current liabilities.
  • Quick ratio (also known as an acid test) measures the ability of a company to use near-cash ("quick") assets to eliminate current liabilities immediately.
  • Reserve requirement, a bank regulation that sets the minimum reserves each bank must hold.
  • Working capital, a financial metric that represents operating liquidity available.
  • Crisis liquidity ratio. A number of Bulgarian academic and accounting publications discuss the "crisis liquidity ratio" (CLR), defined as:
CLR = ⁠current assets − receivables/current liabilities⁠
and recommend its use under stressed conditions, as receivables may be less reliably realizable during crises. Several authors present CLR as a conservative variant of short-term liquidity assessment for stress scenarios, excluding receivables due to heightened collectability risk.[1][2][3]

See also

References

  1. ^ Костова, Надя (2019). Финансов анализ (in Bulgarian). Варна: „Бизнес практика Актив“. pp. 203–204. ISBN 978-954-9587-51-7. „…в кризисна среда… коефициентът за кризисна ликвидност… се изчислява по формулата: (Текущи активи − Краткосрочни вземания)/(Текущи задължения)."
  2. ^ Ivanova, Rositza (2021). "Reflections on the Indicators for the Analysis of the Entity's Liquidity" [Размисли по въпроса за показателите за анализ на ликвидността на предприятието]. KNOWLEDGE – International Journal (in Bulgarian). 44 (1): 62. „Петров (2014, с.148) предлага 'коефициент на кризисна ликвидност'… (Текущи активи − Краткосрочни вземания)/(Текущи задължения)… целесъобразен в криза."
  3. ^ Касърова, Виолета; Йорданов, Иво (9–10 September 2013). "Един подход за диагностика на финансовото здраве на нефинансови предприятия" (PDF). Корпоративните финанси на формиращите се пазари – теория и практика. Трета научно-практическа конференция с международно участие, НБУ (in Bulgarian). София: Нов български университет. p. 14. „…включен, като аналитичен инструмент, коефициентът за кризисна ликвидност: съотношение между текущи активи, намалени с вземанията, и текущи пасиви."
This article is issued from Wikipedia. The text is available under Creative Commons Attribution-Share Alike 4.0 unless otherwise noted. Additional terms may apply for the media files.