How to determine the liquidity of assets. Liquidity - what is it in simple words

The most important property of money is its high liquidity. Liquidity refers to the ability of any property, i.e. assets, directly serve as a means of payment or become a means of payment.

In principle, many types of assets have the property of liquidity. For example, gold bars have high liquidity, despite the fact that gold has ceased to play the role of money. Gold can be converted relatively easily into the currency of any country that can serve as a means of payment. At the same time, in order to convert gold into cash or non-cash money, a certain time is required. This operation is also associated with small costs associated with paying for the services of agents involved in the purchase and sale of gold.

An obsolete TV, on the contrary, has very low liquidity, since it is sold, i.e. converting it into a means of payment is almost impossible. It will take a long time to sell such a TV and pay large commissions.

Cash, banknotes, directly serve as a means of payment, so they have absolute liquidity. Very high, almost absolute liquidity have demand deposits, giving the right to issue checks. Somewhat lower, but also very high, is the level of liquidity of fixed-term and savings deposits and government bonds.

The liquidity factor significantly affects the decisions made by firms and households. Other things being equal, firms and households prefer perfectly liquid cash and almost completely liquid demand deposits. But this type of money has a significant drawback: cash does not generate income, and the interest paid to depositors on demand deposits is low and, as a rule, only compensates for the general increase in prices. Therefore, the real income on these deposits is zero.

The liquidity of term and savings deposits is slightly lower than the liquidity of cash. But these deposits bring real income in the form of interest paid on these deposits.

The liquidity of government bonds and government short-term obligations (GKOs) is still somewhat lower. They cannot directly serve as money, but they are easily sold at a price that corresponds to their face value. According to the liquidity criterion, modern credit money is grouped into several monetary aggregates. The monetary aggregate is an indicator of the money supply, determined by the level of its liquidity.

There are the following monetary aggregates:

M0 - cash; Ml - cash + demand deposits; M2 - cash + demand deposits + savings deposits + small term deposits; M3 - cash + demand deposits + savings deposits + small term deposits + large term deposits; L - the total money supply expressed by the M3 aggregate + savings bonds + short-term government obligations (bills) + commercial bills.

Thus, the money supply circulating in the economies of countries with a developed market system has a rather complex structure. This is shown in fig. 9-3.

Consideration of the structure of the money supply shows that the main role in the functioning of a developed market system is played not by cash, but by non-cash money. But non-cash money cannot exist and circulate without banks. Moreover, cash, represented by banknotes, owes its origin and existence to banks. Therefore, in order to understand how the market system works, we need to understand what banks are.

Liquidity

Absolute liquidity

Absolute liquidity ratio(English) cash ratio) is a financial ratio equal to the ratio of cash and short-term financial investments to short-term liabilities (current liabilities). The data source is the company's balance sheet in the same way as for current liquidity, but only cash and cash equivalents are taken into account as assets: (line 260 + line 250) / (line 690-650 - 640).

Kal = (Cash + short-term financial investments) / Current liabilities Kal \u003d (Cash + short-term financial investments) / (Short-term liabilities - Deferred income - Reserves for future expenses)

It is believed that the normal value of the coefficient should be at least 0.2, i.e. every day 20% of urgent obligations can potentially be paid. It shows what part of the short-term debt the company can repay in the near future.

Market Liquidity

The market is considered highly liquid, if it regularly concludes in sufficient quantities purchase and sale transactions of goods circulating on this market and the difference in the prices of applications for purchase (demand price) and sale (offer price) is small. Each individual transaction in such a market is usually not able to have a significant impact on the price of goods.

Liquidity of securities

The liquidity of the stock market is usually estimated by the number of transactions made (trading volume) and the size of the spread - the difference between the maximum prices of buy orders and the minimum prices of sell orders (they can be seen in the glass of the trading terminal). The more deals and the smaller the difference, the greater the liquidity.

There are two main principles for making transactions:

quotation- placing own orders for the purchase or sale, indicating the desired price.
market- placing orders for instant execution at current bid or offer prices (satisfaction of quotation orders with the best current price)

Quoted bids form instant liquidity market, allowing other bidders to buy or sell a certain amount of an asset at any time. The question will be the price at which the transaction can be carried out. The more quotation orders placed for a traded asset, the higher its instant liquidity.

Market orders form trading liquidity market, allowing other bidders to buy or sell a certain amount of an asset at a desired price. The question will be in the time when the transaction takes place. The more market orders per instrument, the higher its trading liquidity.

Notes

Literature

Brigham Y., Erhardt M. Analysis of financial statements // Financial management = Financial management. Theory and Practice / Per. from English. under. ed. Ph.D. E. A. Dorofeeva .. - 10th ed. - St. Petersburg. : Peter, 2007. - S. 121-122. - 960 p. - ISBN 5-94723-537-4

Categories:

Financial ratios
The financial analysis
Economic terms
Money turnover
Investments
Exchanges
Corporate Governance

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Synonyms:

See what "Liquidity" is in other dictionaries:

Financial vocabulary

- (liquidity) The degree to which the assets of an organization are liquid (See: liquid assets (liquid assets), which allows it to pay its debts on time, as well as to use new investment opportunities. Finance. Sensible ... ... Financial vocabulary

liquidity- 1. The ability of assets to turn into cash. Measured using coefficients. 2. A measure of the ratio between cash or marketable assets and the need of the enterprise for these funds to pay off those that have come ... ... Technical Translator's Handbook

- (liquidity) 1. The ability of assets to easily and quickly turn into money at an easily predictable price. In addition to money itself and deposits in non-bank financial firms such as building societies, short-term securities such as ... ... Economic dictionary

LIQUIDITY, liquidity, pl. no, female (fin. trade. neol.). distraction noun to liquidity. liquidity of goods. liquidity of liabilities. Explanatory Dictionary of Ushakov. D.N. Ushakov. 1935 1940 ... Explanatory Dictionary of Ushakov

Liquidity- Liquidity (Liquidity) - 1. In a general sense - the ability of assets to be sold on the market: quickly and without high costs (high L.) or slowly, at high costs (low L.) Cash has absolute L.. Other assets… … Economic and Mathematical Dictionary

- (liquidity) The degree to which the assets of an organization are liquid (see: liquid assets, which allows it to pay its debts on time, as well as to use new investment opportunities. Business. Smart ... ... Glossary of business terms

The property.

If we evaluate all financial instruments, real estate is a low-liquid instrument. But if we consider only one of them, then again there is a division into low and highly liquid.

For example, luxury apartments, high-value country houses are low-liquid real estate. To sell it at a fair market price, you need to spend a lot of time (several months). And even then, in the end, you still have to throw off the price to the buyer.

And if you take economy-class housing, and even in a good location in the city (somewhere in the center, or in a normal area), then you can consider it as highly liquid real estate due to the fact that there is always a demand for it and it can be easily sold literally in a couple of weeks, in extreme cases 1-2 months.

Why is liquidity so important?

The concept of liquidity is important for investors whose goal is to make a profit from invested funds. And in the event of any negative circumstances in the financial market, they should be able to quickly get rid of unnecessary assets at affordable prices. And transfer the received money to another most promising (and more profitable) financial instrument.

Therefore, when investing money, an investor always tries to choose highly liquid instruments.

For example, if we consider the real estate market, then with a downward trend, you can most quickly get rid of inexpensive real estate. Those. if choosing between ordinary Khrushchev apartments and premium-class housing, the investor will choose the former, due to their high liquidity.

The same is true for the stock market. In the event of a possible collapse of the stock market (which happens periodically), the investor must quickly and with minimal losses get rid of the asset falling in price. And if he has only low-liquid shares in his portfolio, on which there is no buyer, then it remains only to watch how the value of the shares he bought decreases. And in the mind to count the losses.

Liquidity is the ability to get rid of a certain product as quickly as possible by exchanging it for a cash equivalent. If a product is in demand on the market and sells well, this indicates its high liquidity. Depending on the speed of the sale of goods, its liquidity will be determined as high, medium or low.

It seems that all the main definitions and concepts are given in simple language - this is how Wikipedia describes the concept of "liquidity". Next, we will consider separately the liquidity of shares, enterprises and real estate, as well as the factors that influence and form liquidity. We will separately consider liquidity ratios and methods for assessing the solvency of a business.

High liquidity and low liquidity: what is the difference

All goods can be considered as highly liquid or low liquid depending on the speed of their sale. Therefore, from the point of view of the fastest possible receipt of money, securities and deposits in banks are highly liquid goods, because sometimes a couple of minutes are enough to turn them into banknotes. Real estate, on the other hand, will be “illiquid” in comparison with them, and the more expensive it is and the more difficult it is to sell, the less liquid it will be considered.

Liquid currencies are the most popular banknotes used all over the world or in a certain large region for making purchase and sale transactions. The liquidity of a currency is affected by the economies of countries in which this currency is the main or reserve currency. The most liquid currencies in the world:

American dollar.
Euro.
British pound.
Japanese yen.
Swiss frank.
Australian dollar.
Canadian dollar.

The ruble is currently an illiquid currency.

Liquidity of securities: what makes blue chips special

Securities are called bills, shares, bonds and other monetary documents that certify some of the property rights of their owner (for example, the right to pay dividends - part of the company's profits). Being a highly liquid commodity, securities in their group are also divided into "liquid" and "non-liquid". Illiquid goods are rarely in short supply - there is little demand for them, few people buy them.

Securities, in their own hierarchy, are subdivided into blue chips, second tier, third tier, and so on. In simple terms, the more distant the securities are, the lower their liquidity. Such securities are difficult to sell at a good price - as a rule, on their sale you can lose about a quarter of their original value.

"Blue chips" is a concept that came from American casinos. There, blue chips have the highest monetary value. Today, this is the name given to the most liquid shares - shares of large companies that are in the top thirty largest companies in their country or in the world (depending on which market we evaluate).

In our country, "blue chips" mainly include shares of banks and companies for the extraction and processing of gas and oil: Rosneft, Gazprom, LUKOIL, Sberbank. In America, "blue chips" are concentrated in the field of IT - they include the securities of Google, Microsoft, Facebook and a number of other corporations.

Business liquidity: what does it depend on

The liquidity of an enterprise is a very important indicator of its solvency and general condition. In the economic analysis of the company's success, balance sheet liquidity plays an important role - the company's ability to timely allocate cash flows to pay off debts. Simply put, the more a kind of "golden parachute" of free funds of the company, which it can reallocate to eliminate problems, the higher the liquidity of the balance sheet of such a company. Investors will invest in such a company.

The property of the enterprise is divided into assets and liabilities.

Assets can be:

highly liquid (investments and finance).
fast-selling (short-term debt).
negotiable (sold slowly).
non-negotiable (implemented very slowly).

Liabilities can be:

urgent.
current.
long-term.
the company's own capital.

About business liquidity analysis in general terms

To analyze the liquidity of an enterprise, the so-called liquidity ratios are used:

current liquidity ratio.
quick liquidity ratio.
absolute liquidity ratio.

The current liquidity ratio (also known as the coverage ratio) determines the ratio of the company's financial assets and its short-term liabilities. It is believed that ideally this coefficient should be equal to 2.

The quick liquidity ratio is calculated as the sum of all highly liquid assets divided by the company's short-term debt. Quick liquidity is an indicator of solvency. Ideally, it should be equal to 1.

The absolute liquidity ratio varies from 0.05 to 0.1 and shows the reliability of the borrower.

Real estate liquidity: how is it determined

Real estate itself has low liquidity. However, if we consider, for example, an elite luxury house and a new budget segment building on the outskirts of a large city, the new building will have much greater liquidity, since much more people can buy apartments in it, and it will be easier to sell them.

In the sale of real estate, the same rules apply to determine liquidity - the easier it is to sell, the higher the liquidity.

Why is liquidity so important?

Potential investors are most interested in liquidity. On the one hand, they must be sure that the project can turn out to be profitable and their securities will rise in price. On the other hand, the loss control rules force investors to choose projects whose securities will be easier to get rid of in case of unforeseen difficulties.

Crashes happen periodically in the stock market, and traders whose portfolios contain only low-liquid stocks, in such cases, are forced to look at falling quotes and calculate their losses, being unable to get rid of illiquid securities.

Liquidity and solvency ratios provide useful information to almost all groups of users of financial statements and can serve as a rationale for making most financial decisions.

The concept of liquidity

According to the textbook Accounting (financial) statements, edited by Sokolova V.Ya.:
Liquidity- this is, first of all, the property of an asset to be converted into the money supply or money equivalent. Analyzing the liquidity of the company, they evaluate the availability of working capital in the amount sufficient to repay short-term obligations, even if they are in violation of the maturity dates. An organization can be liquid but insolvent and vice versa.
Kupriyanov L.M.. the concept of liquidity is interpreted as follows:
Liquidity— the ability of the company's assets to quickly transform into cash at the value reflected in the balance sheet, if necessary, repay obligations to employees for the payment of wages, the state for the payment of taxes to the budget, owners for the payment of dividends, to counterparties, creditors, etc.
According to I. V. Kobeleva liquidity is determined by the ability of an economic entity to quickly and with minimal financial losses convert its assets (property) into cash. It is also characterized by the presence of the organization's liquid funds in the form of cash balances on hand, cash on correspondent accounts in banks and easily realizable elements of current assets (for example, short-term securities). In addition, liquidity implies unconditional solvency and constant equality between assets and liabilities, both in terms of the total amount and the maturity of liabilities.
According to position A.A. kanke, liquidity - a characteristic of certain types of company assets by their ability to quickly turn into cash without reducing the book value to ensure the required level of solvency of the organization. The faster it is possible to sell an asset for money and the higher the probability of this operation, the higher the level of its liquidity.
According to P.F. Askerova the liquidity of an asset is its ability to be transformed into cash. The faster an asset turns into cash, the higher its liquidity.
According to the definition given Kovalev V.V., the liquidity of an enterprise is understood as "... the presence of working capital in an amount theoretically sufficient for the full repayment of short-term obligations, even with violation of the maturity dates stipulated by contracts." The default clause, according to the author of the definition, suggests that failures in the receipt of funds from debtors are not excluded, but in any case, this money will come and it will be enough for settlements with all creditors. It follows from the definition that the main sign of the liquidity of an enterprise is the formal excess of current assets over short-term liabilities.
Negashev E.V. in his monograph "Analytical modeling of the financial condition of the company" gives the following formulation:
Company liquidity in a general sense, we define it as covering the company's liabilities with its assets, the period of transformation of which into cash corresponds to the maturity of liabilities. The company's liquidity is the marginal estimate of the ability to pay (at the time of possession or in the future) all of the company's liabilities that are in place at the reporting date, or a certain part of them, based on an assumption about the timing of the conversion of assets into cash. Since the actual timing of the conversion of assets into cash may differ from the expected timing, the assessment of the company's liquidity is predictive in nature and predicts the future repayment of liabilities only with some probability.
In general, it can be summarized that most authors give identical definitions of the concept of liquidity.
It is assumed that the definition of a company's liquidity allows the combination of various liabilities with different maturities into an aggregate measure of the total value of liabilities with maturities not exceeding a certain maximum value. An example of such aggregation is the value of short-term liabilities, reflected in the balance sheet as a result of section V (excluding deferred income). According to the Accounting Regulation “Accounting Statements of an Organization” (PBU 4/99), for short-term obligations, the maximum maturity is 12 months or the duration of the operating cycle, if it exceeds 12 months.
Accordingly, for the purposes of determining a company's liquidity, assets with different maturities to cash can be combined into an aggregate measure of the total value of assets with maturities not exceeding a certain maximum value. An example of aggregating assets to determine liquidity is the amount of current assets reflected in the balance sheet as the result of section II (with the exception of long-term receivables and debt of participants (founders) on contributions to the authorized capital). According to the Accounting Regulation “Accounting Statements of an Organization” (PBU 4/99), for current assets, the maximum period for converting into cash (circulation period) is 12 months or the duration of the operating cycle, if it exceeds 12 months.

Liquidity types

Balance liquidity organization determines the extent to which the obligations of the organization are covered by its assets, the period of conversion of which into cash corresponds to the maturity of the obligations. Balance sheet liquidity is based on accounting valuations of assets.
Liquidity of assets in general can be defined as the ability of assets to be exchanged for money, and the shorter such a period, the more liquid assets can be considered.
Company liquidity shows the composition of assets, the share of the most liquid assets in the overall structure. Depending on the specifics of the business, the liquidity of an organization helps to determine its industry affiliation.
The liquidity of a company is fundamentally different from the liquidity of the balance sheet in that the basis for its determination is the market price, which changes rapidly under the influence of many factors, and therefore may not coincide with accounting estimates. The liquidity of the company, most often, is determined at the time of assessing the value of net assets when they are sold on the market.

Liquidity assessment

Distinguish current, critical and absolute liquidity companies in terms of covering short-term liabilities with current assets (in this case, the maximum period for converting current assets into cash corresponds to the maximum maturity of short-term liabilities).
The company's current liquidity means covering short-term liabilities with the company's current assets.
The critical liquidity of a company means covering short-term liabilities with cash and cash equivalents, short-term financial investments and receivables.
The absolute liquidity of the company means the coverage of short-term liabilities by the amount of cash and cash equivalents.
The level of current, critical and absolute liquidity can be excessive, sufficient and insufficient. Sufficient levels of current, critical and absolute liquidity may differ significantly from each other in terms of coverage of short-term liabilities. Sufficient levels of liquidity are determined by generally accepted empirical estimates (which may be erroneous), macroeconomic conditions, industry affiliation of the company, the nature of its business model, but at present, financial analysis lacks their rigorous theoretical justification, the construction of which is one of the important tasks of the theory of analysis financial stability.
A sufficient level of current liquidity of the organization follows from the rule of thumb mentioned above, according to which, in the event of a need for a quick sale of assets, their price will be half of their market value (along with the market value, both the actual acquisition cost and the current (replacement) cost can be considered). In accordance with this rule, current assets should be twice as large as short-term liabilities (it is assumed that the share of cash is sufficiently small):

Where Ez - stocks, Edz - short-term financial investments, Eds - cash and cash equivalents, Kkk - short-term loans and borrowings, Kkz - accounts payable.

Where F - non-current assets combined with long-term receivables;

E~ - stocks (including raw materials, materials, costs in work in progress, finished products, goods for resale, goods shipped, deferred expenses, other stocks and costs, VAT balance on acquired valuables, not deductible);

E - short-term financial investments (excluding cash equivalents) and short-term receivables, with the exception of debts of participants (founders) on contributions to the authorized capital (other current assets, depending on their role in the circulation, are added either to stocks or to debtors);

E - cash and cash equivalents (in accordance with the Accounting Regulations "Statement of Cash Flows" (LBU 23/2011), highly liquid financial investments that can be easily converted into a known amount of cash and which are subject to insignificant value risk);

K - real equity capital (net assets);

K - long-term liabilities (including long-term loans and borrowings, deferred tax liabilities, long-term estimated liabilities and other long-term liabilities);

K - short-term credits and loans;

K - accounts payable, short-term estimated liabilities and other short-term liabilities (except for deferred income, reflected in net assets).

A sufficient level of critical liquidity means that the company is able to repay short-term liabilities with cash and cash equivalents pi expected in the short term from the repayment of financial investments and receivables. This requirement assumes that short-term financial investments and short-term receivables are more liquid (more quickly converted into cash) than stock items, which may not be true in the general case. But since liquidity is an approximate predictive estimate of the repayment of short-term obligations, focused to a greater extent on the tasks of external analysis based on the information contained in the financial statements, such an assumption is acceptable. If the analyst has additional information about insolvent debtors or low-liquid financial investments, then the assessment of critical liquidity can be adjusted downward. A sufficient level of critical liquidity ensures the equality of the sum of the relevant elements of current assets and the sum of short-term liabilities:

A sufficient level of absolute liquidity means that the company can repay a certain part of its short-term liabilities from the balance of cash and cash equivalents. A sufficient level of absolute liquidity ensures that the amount of cash and cash equivalents is equal to the amount of short-term liabilities taken with a given coefficient reflecting the minimum share of the most urgent liabilities, usually significantly less than 100%:

Where - the minimum share of the most urgent liabilities (the minimum normal limit on the absolute liquidity ratio).
The deviation of current, critical and absolute liquidity from a sufficient level up or down creates, respectively, situations with excess or insufficient liquidity.
Criteria of financial stability can be constructed for each of the listed types of liquidity, but the most meaningful are the criteria obtained as necessary and sufficient conditions for critical liquidity.
To measure the level of critical liquidity, we will use an absolute indicator, which is the difference between the most liquid assets (cash and cash equivalents, short-term financial investments and short-term receivables) and short-term liabilities, which, based on expression (1), can be written as follows:

Using indicator (2), the condition for achieving a sufficient level of critical liquidity or exceeding it is written as a condition for the non-negativity of the absolute liquidity indicator:

The identity follows from the balance sheet model of the financial condition:

The left side of identity (3) is the absolute liquidity indicator (2), for which, therefore, we can write the ratio:

Therefore, when a sufficient level of critical liquidity is reached or exceeded, inequality () is also observed for expression (4), which reflects an additional method for calculating the absolute liquidity indicator:

Transforming which, we obtain the limitation of the value of stocks by long-term sources of their formation, which is a necessary and sufficient condition for the non-negativity of the absolute indicator of critical liquidity (i.e., achieving a sufficient level of critical liquidity or exceeding it):

I.e
where E s- own working capital equal to the difference between own capital and non-current assets and being the value of own sources of financing current assets;
E D- long-term sources of reserves formation. The name “long-term sources of reserves formation” of indicator E is, to a certain extent, conditional. If long-term loans and borrowings, usually used as a source of financing for the creation and acquisition of non-current assets, make up the majority of long-term liabilities, then the indicator
E D can be considered as an adjusted value of own working capital. The name "long-term sources of stock formation" indicates that own working capital
E s increased by the amount of long-term liabilities, since the use of long-term liabilities along with equity to finance non-current assets allows you to increase your own sources of formation of current assets:

where - the adjusted value of own working capital;
- part of non-current assets financed by equity.
Relationship (4) also implies the conditions for non-decrease in the company's critical liquidity for a certain period of time (for example, for the reporting period):
(5)
where - changes in the corresponding indicators for the period.
Condition (5) means, in particular, that the critical liquidity of the company will not decrease if the increase in the balances of non-current assets, long-term receivables and inventories occurs within the sum of the increase in real equity (net assets) and the increase in long-term liabilities.
The change in real equity capital as a result of the ordinary activities of the company is determined mainly by the net profit (loss) received in the reporting period. Therefore, in the absence (or insignificance) of the influence of other factors on the change in real equity capital, condition (5) can mean the following: the critical liquidity (financial stability) of the company will not decrease if the change in the balances of non-current assets, long-term receivables and stocks will be carried out by the company within the amount of net profit (loss) received in the current period and changes in long-term liabilities. Checking the fulfillment of this condition involves reflecting changes taking into account algebraic signs (positive or negative). For example, if the result of the company's activities in the reporting period is a loss, and long-term liabilities are repaid, then the company's critical liquidity will not decrease if the sum of the balances of non-current assets, long-term receivables and inventories decreases by an amount not less than the module of the amount of loss and decrease in long-term liabilities (or, what is the same, if the negative value of the amount of loss and decrease in long-term liabilities will be greater than the negative value of the sum of changes in non-current assets, long-term receivables and stocks).
Inequality (the upper limit on the value of reserves by the value of long-term sources of their formation) is a condition for a sufficient or excessive level of critical liquidity. In the case of equality of the value of reserves and the value of long-term sources, there is a sufficient level of critical liquidity, in case of excess of long-term sources over the value of reserves - an excess level of critical liquidity. Therefore, the difference between the value of long-term sources and the value of stocks can be considered as a criterion function of normal (sufficient) financial stability within the framework of the analytical approach.