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Balance sheet liquidity analysis

The liquidity of the balance sheet is the degree of coverage of the enterprise’s liabilities of its asset, reflecting the rate of return of funds that were invested in the acquisition of different types of property and liabilities in turnover.
Liquidity of the balance sheet is estimated on the basis of form No. 1 of the financial statements “Balance sheet”.

Indicators for analysis of balance sheet liquidity
In order to analyze the liquidity of the balance sheet, it is necessary to divide the indicators of this form of financial statements into the following groups:

The most liquid assets (A1) are the amount of cash and financial investments.
Quickly realizable assets (A2) – current assets, short-term accounts receivable.
Slow-selling assets (A3) – inventories, long-term receivables, VAT on acquired values.
Hard-to-realize assets (A4) are non-current assets.
The most urgent liabilities (P1) are short-term liabilities.
Short-term liabilities (P2) – short-term loans and borrowings.
Long-term liabilities (P3) – long-term loans and borrowings.
Fixed liabilities (P4) – equity, deferred income and reserves for future expenses.
Thus, the performance of the group And are taken from the asset side of the balance sheet and figures group P – of its liabilities, the result should be equality between the sum of the group A and the sum of group P.

The balance sheet is liquid if the indicators A1, A2, A3 are greater than or equal, respectively, to the indicators P1, P2, P3, and the indicator A4 is less than or equal to the indicator P4.

To analyze the liquidity of the balance sheet on the basis of the above indicators, you can use the analytical table, which will be grouped the necessary indicators, as well as assess the value of inequalities.

For example:
The above example shows that the balance of the enterprise can not be called liquid, because some inequalities are not met (A1 and A3 must be greater than or equal to P1 and P3, respectively).

Analysis of the liquidity of the balance sheet is better to assess the dynamics, using the financial statements for several periods. In this case, it is possible to identify the period in which the balance sheet was the most liquid, as well as to assess the reasons for which liquidity is reduced.

Calculation of liquidity ratios
In order to continue the analysis of the balance sheet liquidity, it is necessary to calculate the following coefficients:

Absolute liquidity ratio is the ratio of the most liquid assets to short-term liabilities.
Quick ratio is the ratio of cash, short-term financial investments and short-term receivables to short-term liabilities.
Current ratio is the ratio of the total amount of liquid working capital to short-term liabilities.
Net current assets – the difference between total liquid current assets and short-term liabilities.
The absolute liquidity ratio shows how much of the short-term liabilities, if necessary, can be repaid immediately. The normal value of the absolute liquidity ratio ranges from 0.2-0.3.

According to the example discussed earlier, the absolute liquidity ratio is 0.02 (1979 / 118407), which indicates a poor level of liquidity.

The quick liquidity ratio shows how much of the current liabilities can be paid off both from cash and from the expected income from buyers. On the basis of these data, it is possible to calculate the quick liquidity ratio, which is 4.8. This means that only 4.8% of current liabilities can be paid off with available funds and expected revenues from buyers, which is also not a good value.

Current ratio characterizes whether the company has sufficient funds to repay short-term liabilities. The structure of the balance sheet is considered satisfactory if the value of this indicator is greater than or equal to 2. If we calculate the current liquidity ratio from the data, it will be equal to 4.9, which is much higher than the normal level of this indicator.

Net current assets characterize the overall financial stability of the enterprise. This indicator should be considered over several periods to assess whether the enterprise tends to increase the financial resources of the enterprise to expand its activities.

Based on the above, readers of the world Councils can conclude that the analysis of liquidity balance is an important process in the planning of business activities, as well as the evaluation of the results already obtained. Analysis of balance sheet liquidity indicates how quickly can be redeemed obligations of the organization due to existing assets.

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Balance sheet liquidity analysis
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