what you need to know about this economic indicator
Analyzing your company’s liquidity ratio is essential if you want to know how its financial health is. That’s why here we present a guide so you can understand its concept and importance, as well as how each result is calculated and interpreted. Let’s get started!
What is the liquidity ratio?
First of all, it is necessary to understand what liquidity is. It is simply defined as the ability of a company to transform its assets into cash to meet its short-term debts.
Based on this concept, we can say that the liquidity ratio is a financial indicator that indicates precisely the ease with which an organization can or cannot convert its assets into a means of payment. All this with the purpose of evaluating the financial health of the business and determining how solvent it is considering its debts.
Importance of liquidity ratio for startups and SMEs
Understanding, calculating and analysing your company’s liquidity ratio is essential, as it allows you to know certain aspects of your management that you can improve to deal with any unforeseen events. In this way, the indicator provides you with information to make informed decisions that help you maintain your business for longer.
Other aspects to consider are:
- Remember that, without a stable financial base, accelerated business growth becomes unsustainable.
- Having a healthy liquidity ratio helps you get new investors or even loans from banking institutions. This is one of the first indicators that economists evaluate to know how your business is doing.
Components of the liquidity ratio
Before calculating the liquidity ratio, you need to understand some basic concepts that are part of the equation. These include current assets and current liabilities, which are defined as follows.
Current assets
Current assets are all the assets and rights that a company has that can be converted into south africa email list cash in less than a year. It is from these assets that short-term obligations (12 months or less) are covered.
We can classify current assets into three categories:
Current liabilities
In contrast to the previous case, current liabilities represent all short-term obligations 4 ways List cleaning can Increase your email marketing ROI or debts. This includes accounts payable, debts with suppliers, tax payments, and loan sms to data payments, among others.
Having a large number of these liabilities reduces the company’s liquidity and can affect its financial health.
Types of liquidity ratios
Now that you know what the liquidity ratio is, you need to learn how to use the different variants that exist. Each type of ratio is differentiated by including or excluding one of the components we talked about above (current assets and liabilities).
From this, we obtain several types of ratio that you need to know:
- Defensive liquidity ratio : Finally, we have an indicator that compares liquid assets with the organization’s operating expenses. All this with the aim of knowing whether the company can continue to operate without sacrificing other assets.
In general, the calculation of each liquidity ratio is very similar and is based on the same equation, which we will see later.
Each of these variants will yield results that may be greater than one, equal to one, or less than one. However, it is important to note that the analysis of these results varies depending on the type of ratio and the information that the company needs.