In the conditions of market relations the enterprise is obligedalways be able to repay their debts (that is, they have solvency) and short-term liabilities (have liquidity) as soon as possible. The current liquidity ratio shows how much these obligations are being fulfilled.
An enterprise is considered solvent ifthe volume of its current assets is greater than long-term and short-term liabilities. The organization is liquid, provided that the amount of these funds is greater than the short-term debt.
Assessment of changes in the degree of liquidity andsolvency of an economic entity includes a comparison of the balance sheet indicators, which are broken down into different groups of liabilities and assets. To calculate the current liquidity ratio, you first need to "turn to the sources".
The current liquidity ratio shows how much a company can pay liabilities at the expense of assets. By the degree of liquidity, the assets of an economic entity can be conditionally divided into:
A1 - the most liquid (short-term investments, cash, the value of shares repurchased from shareholders);
A2 - assets that can be implemented quickly (receivables in the short term, as well as other current assets from the 2 sections of the balance sheet);
A3 - assets with low liquidity (value added tax on acquired values, debt on contributions to the authorized capital, financial investments in the long-term period);
А4 - practically not liquid (accounts receivable in the long-term period, and also means from 1 section of balance (besides the articles which are included in group А3)).
Information regarding liabilities:
P1 - the most urgent obligations (debt in the payment of income, accounts payable, other liabilities in the short term);
P2 - short-term liabilities (loans and borrowings in the short term);
P3 - long-term liability (loans and borrowings in the long-term period);
P4 - a permanent passive (section 3, future expenses and incomes of the future period).
The balance is considered to be absolutely liquid if: 3 first groups of assets are more than 3 first groups of liabilities, respectively, and А4 <П4.
The current liquidity ratio shows whether the enterprise is able to meet its liabilities using current assets. It causes great interest among investors - external entities.
The current assets of the enterprise in relation toshort-term debt is the ratio of current liquidity. The standard of this indicator varies from 1.50 to 2.50. It depends on the branch of economic analysis.
The higher the value, the greatersolvency is owned by an economic entity. Critical is the indicator less than 1 - this means that the company is not able to pay the obligations, provided that they need to be repaid immediately.
The coefficient of current liquidity shows,whether the organization is able to convert its values into a monetary form without losses, as well as the likelihood of timely covering current liabilities with the assets of the enterprise.