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What are Liquidity Ratios
Liquidity of the enterprise is the ratio between its payable liabilities and the amount of liquid assets. It determines the rate of the enterprise's ability to meet its obligations.

Liquidity of the enterprise is the ratio between its payable liabilities and the amount of liquid assets. It determines the rate of the enterprise’s ability to meet its obligations.

The enterprise liquidity is reflected by the liquidity ratios based on balance sheet and income statement:

Lack of mentioned liquidity ratios is the fact that they are derived from the balance sheet data presented as of a certain date and thus they have a static character. Therefore, it is often used as an indicator derived from cash flow. It is indicated as the cash flow ratio from operating activities to average state of short-term liabilities. For financially healthy company the optimum ratio is given as 40 % or greater.

The enterprise liquidity is a prerequisite for financial stability (equilibrium) of the enterprise. If the enterprise is permanently illiquid, it is insolvent. On the other hand, excessive liquidity reduces the profitability of the enterprise (free cash does not bring revenue). Revenue increases primarily new machines, technology, new materials. The enterprise management must therefore seek the optimal liquidity and simultaneously maximize profitability.

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Last update: 07.11.2016

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