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 the following:

${\displaystyle \mathrm {LR} ={\frac {\mathsf {\text{liquid assets}}}{\mathsf {\text{short-term liabilities}}}}}$

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

${\displaystyle \mathrm {CLR} ={\frac {{\mathsf {\text{current assets}}}-{\mathsf {receivables}}}{\mathsf {\text{current liabilities}}}}}$

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

• Accounting liquidity
• Liquidity coverage ratio
• Market liquidity

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."