Overall Liquidity Ratio
Companies have different formulas in finding out the varied ratios that will show the liquidity of the company to determine if the total operation of the company is doing well in the business. The 3 basic liquidity ratios are the operating cash flow ratio, the current ratio and the quick ratio.
Liquidity ratio, also referred to as the working capital ratios, explains the status of the company with regards to paying the short-term obligations. It is also commonly used to picture out the relationship of both the current liabilities and current assets of the company.
In the insurance industry, the overall liquidity ratio is described as the total assets divided by the total liabilities minus the conditional reserves. This overall liquidity ratio indicates that the ability of the company to cover liabilities by its total assets. This ratio, however, does not include the not invested assets, the marketability and the quality of the premium balances as well as the affiliated investments.
Another form of a liquidity ratio is the current ratio. This is described as the relationship between the current liabilities and the current assets which is required by the state security bureau to reach a 2:1 ratio upon selling a stock of the company. On the other hand, quick ratio, which is referred to be a better short-term solvency indicator, subtracts the current assets to the inventory to determine the percentage in relation to cash equivalents and cash to the current liabilities.
Banks and stockholders usually evaluate loan applications as often as possible to examine the liquidity ratios most especially to most loan contracts that require maintenance of a minimum desired liquidity ratio. To be able to guarantee the safety of the business loans, most of the companies are aiming to improve the rate of their liquidity ratio by laying the facts in a balance sheet. Availing a long-term loan may in repaying a short term debt may be a good strategy to improve the ratio. Other ways to improve the liquidity ratio of the company include converting the inventory to cash, delaying purchases, invoicing earlier pending orders, and appraising in a higher value at the end of the year.
Since liquidity ratio is used to estimate the general short-term debt solvency, it should be taken into account that this ratio may not be a good demarcation of the health of the company. These ratios usually are based on the liquidation concept prior only to the assets to meet the liabilities of the present period but not in an operating company. Though, the most common disregarded term which is the CCC or that what we call Cash Conversion Cycle, offers a very critical data with regards to the efficiency of the management of the company as well as its capability to meet the liabilities. CCC examines how fast the company manages the inventory to be converted to sales, pays the employees for the goods and services rendered and collects the various accounts.