Question

comment in detail on the liquidity of the company.

Answer 1

LIQUIDITY OF THE COMPANY

  Liquidity of the company is the ability to use its current assets to meet its short term liabilities. Financial liquidity refers to how easily assets can be converted into cash.Current assets are highly liquid which we can easly convert into cash but in case of fixed or long term asset it is very difficult to convert into cash. Assets like stocks,bonds,Account recievable, promissory note etc can be easly convert into cash. So keeping the liquid asset can be help to get speculative advantage.

A company is also measured by the amount of cash it generates above its liabilities.It means keeping more cash will be more better for the companies to makeup an image among the public and it will also helps the company to keep in a better position.So here a question arise, why the company need liquidity and what is the purpose of keeping liquid asset. There are several reason for this purpose. Liquidity provide the ability to turn the assets to the investments.Low liquidity assets are difficult to sell for their original value and so it is very difficult to convert to cash.Every businesses will have emergency or immediate need of cash.so to meet these kind of needs liquid assets are very essential. A small business’s liquidity ratio tells about the ability of creditors and investors that your company is stable, and most importantly, has enough assets is in hand to maintain the business always stable.

EXAMPLE OF LIQUID ASSETS

1. Marketable securities

2.Stock

3.Government bonds

4.Account recievable

5.Certificate of deposit

6.promissory note

7.Tax refund

These are some example of liquid asset. Companies usually keeps these kind of asset inorder to keep liquidity preference.So analysing the companies liquidity is very much essential. There are different methods are used to find out the liquidity. Liquidity ratio is uded to findout the liquidity preference of the company.Financial ratios are used to findout the liquidity position of the company.There are various ratios are used to identify the liquidity position. These are the three major components or financial tools for liquidity analysis.

Current ratio = Current asset / current liability

Quick ratio = Current asset - inventory / current liability

Net working capital = current assets - current liability

By a proper analysis we can identify the liquidity position of the company. For an analysis of this firm, it also is important to examine data for this firm's industry. Although it's helpful to have many years of data for the firm, which provides information on the trend in the ratios, it is also important to compare the firm's ratios with the industry. This is how the liquidity position is analysing.