Liquidity level

Degrees of liquidity are business indicators used in corporate finance and financial accounting in particular , with which the ability of a company to meet its payment obligations on time can be assessed. Degrees of liquidity describe the properties of assets in terms of their proximity to money (easy to convert into money) or remotely (difficult to convert into money).

backgrounds

A distinction is made between first, second and third degree liquidity according to increasing maturity . The English terms Cash Ratio (cash liquidity), Acid Test Ratio (also Quick Ratio ) and Current Ratio are becoming increasingly popular in German-speaking countries . The following liquidity rules must be observed when assessing companies: First-degree liquidity (cash liquidity) should be greater than or equal to 0.2. The so-called "Acid Test" states that for a positive evaluation of a company the 2nd degree of liquidity should be greater than or equal to 1 and the so-called "Banker's Rule" provides for a positive company evaluation that the 3rd degree of liquidity is greater or equal 2 must be.

1st degree liquidity

The first degree liquidity (cash ratio) indicates the ratio of liquid funds to the short-term liabilities of a company and thus allows an analysis of the extent to which a company can meet its current short-term payment obligations solely through its liquid funds. The requirements are not taken into account.

Calculation:

${\ displaystyle \ mathrm {Cash \ Ratio} = \ mathrm {{liquid \ funds} \ over {short-term \ liabilities}}}$

2nd degree liquidity

The liquidity 2nd degree ( Acid Test Ratio (ATR) or quick ratio ), also feed liquidity (short-EL) is the ratio of financial assets to plus investments and current receivables to current liabilities of a company. It is a measure of whether a company is able to pay its short-term debt. If the ATR is less than 1, part of the short-term liabilities is not covered by short-term available assets. This can lead to a liquidity bottleneck.

The ATR can be determined in different ways:

${\ displaystyle \ mathrm {ATR} = {\ mathrm {(financial assets {\ ddot {o}} genes + securities + short-term \ receivables)} \ over \ mathrm {short-term \ liabilities}}}$

3rd degree liquidity

The third degree liquidity ( current ratio ) is the ratio of current assets (English current assets ) to current liabilities of a company on. If the current ratio is less than 1, then some of the short-term liabilities are not covered by the current assets, i.e. fixed assets may have to be sold to cover the liabilities. Therefore, this liquidity ratio should always be greater than 1. According to the so-called "banker's rule" (also called two-to-one rule ), this should be at least two. This target is a requirement of US banks when granting loans. It is based on US-American accounting standards, which are geared towards equity providers. It was also developed in the context of US economic structures and legislation. A second, also often mentioned target value is a value of at least 1.2. This is based on accounting, which, as in Germany, Austria and Switzerland, is based on lenders in an environment of Central European economic structures and legislation. However, with the BilMoG, German accounting is developing more in the direction of IFRS , which in turn is closer to US accounting.

Calculation: ${\ displaystyle {\ begin {aligned} \ mathrm {Current \ Ratio} & = {\ mathrm {Umlaufverm {\ ddot {o}} gen} \ over \ mathrm {short-term \ liabilities}} \\ & = {{\ mathrm {Financial assets {\ ddot {o}} gen} + \ mathrm {securities} + \ mathrm {claims \ and \ other \ assets {\ ddot {o}} counterpart {\ ddot {a}} nde} + \ mathrm {Vorr {\ ddot {a}} te}} \ over \ mathrm {short-term \ liabilities}} \ end {aligned}}}$

3rd degree liquidity (L3) is related to working capital (WC) in the following way :

L3 = 1 ↔ WC = 0
L3> 1 ↔ WC> 0
L3 <1 ↔ WC <0

Individual evidence

^ Gerhard Mensch: Finance Controlling. Financial planning and control Controlling for financial management. 2008, 2nd edition, Oldenbourg Wissenschaftsverlag, ISBN 978-3-486-58215-4 , p. 181
↑ Lutz Kruschwitz, Rolf OA Decker, Michael Röhrs: Exercise book for operational finance. 2002, 6th edition, Oldenbourg Wissenschaftsverlag, ISBN 978-3486259452 , p. 283
^ Johannes Ditges, Uwe Arendt: Bilanzen 2002, 10th edition, Kiehl-Verlag ISBN 978-3470536811 , p. 378
↑ Hilmar J. Vollmuth: Read balance sheets correctly, understand them better, design them optimally: With special section BilMoG and the current tax changes 2009, 9th edition, Haufe-Lexware ISBN 978-3448093070 , p. 216
↑ Jörg Wöltje: Investment and Financing 2013, 1st edition, Haufe-Lexware ISBN 978-3648032336 , p. 507
↑ liquidity . Website entrepreneur lexicon. Retrieved April 12, 2015.
↑ Liquidity ratios . Website Aktien-Portal.at. Retrieved April 12, 2015.
↑ 3rd degree liquidity . Website accounting portal Waldlandwelt. Retrieved April 12, 2015.

[1] Gerhard Mensch: Finance Controlling. Financial planning and control Controlling for financial management. 2008, 2nd edition, Oldenbourg Wissenschaftsverlag, ISBN 978-3-486-58215-4 , p. 181

[2] Lutz Kruschwitz, Rolf OA Decker, Michael Röhrs: Exercise book for operational finance. 2002, 6th edition, Oldenbourg Wissenschaftsverlag, ISBN 978-3486259452 , p. 283

[3] Johannes Ditges, Uwe Arendt: Bilanzen 2002, 10th edition, Kiehl-Verlag ISBN 978-3470536811 , p. 378

[4] Hilmar J. Vollmuth: Read balance sheets correctly, understand them better, design them optimally: With special section BilMoG and the current tax changes 2009, 9th edition, Haufe-Lexware ISBN 978-3448093070 , p. 216

[5] Jörg Wöltje: Investment and Financing 2013, 1st edition, Haufe-Lexware ISBN 978-3648032336 , p. 507

[6] liquidity . Website entrepreneur lexicon. Retrieved April 12, 2015.

[7] Liquidity ratios . Website Aktien-Portal.at. Retrieved April 12, 2015.

[8] 3rd degree liquidity . Website accounting portal Waldlandwelt. Retrieved April 12, 2015.