What are the differences between the current and absolute liquidity

Liquidity is the ability to easily turn assets into cash. In the broad sense liquidity represents the solvency of the organization, i.e. its ability to timely meet its debts. To assess the viability of the enterprise to calculate the measures of absolute and current liquidity.

Current liquidity

In the process of assessing the liquidity and creditworthiness of enterprises consider the current liquidity ratio. This coefficient is calculated according to the balance sheet and reflects the percentage of repayment of short-term liabilities of the company by its current assets. The higher the coverage ratio the debt, the more attractive the enterprise is for potential borrowers.

The current liquidity ratio is calculated by dividing the sum of all current assets by the amount of current liabilities. The value of the current assets determined by the indicators of the second section of the balance sheet "current assets and includes cash, inventory, liabilities receivables, short-term investments. Current liabilities include short-term loans and borrowings, payables and amount of other borrowed funds.

The normative value of the coefficient of debt repayment must be greater than 2. The calculation of this indicator is of particular interest to creditors because it reflects the ability of companies to fully pay off their debts in the event of a decline in the market prices of assets.

Absolute liquidity

Absolute liquidity ratio is calculated as the ratio of highly liquid assets to the value of the most urgent liabilities. As a highly liquid asset is cash and short-term investments. Under understand current liabilities short-term liabilities, net of deferred income and reserves for future expenses.

From the calculation of the absolute liquidity can determine the value of the forward commitment, the organization can repay in the shortest possible time. Optimal is the value of the coefficient greater than 0.2. The value of this index is the most important for future vendors and lenders, providing short-term loans.

The differences between the current and absolute liquidity

The calculation of the coefficients of the current and absolute liquidity, provides an opportunity to assess the solvency of the company in the short term. Unlike the measure of absolute liquidity coverage ratio reflects the ability of the company to meet its debts in the long term.

Absolute liquidity shows the ability of the organization to pay its most immediate liabilities with cash and collected receivables. The indicator of current liquidity to account not only the money received from the sale of finished products and implementation of accounts receivable, and proceeds from the sale of current assets.

For shareholders and potential investors of great importance is the indicator of current liquidity, and to suppliers and creditors for a short time — absolute liquidity.