Calculate the Liquidity Ratio to Know the Company’s Financial Performance

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Every company must be able to meet their financial obligations that must be met. According to S. Munawir in the book he wrote explained if the liquidity ratio shows the ability of a company to meet its financial obligations that must be met immediately, or the company’s ability to meet financial obligations when billed.

Therefore, every company must understand the liquidity ratio which consists of several types, namely the current ratio or the current ratio, the fast ratio or quick ratio, and the ratio of cash or cash ratio. For more details, the following will be explained on how to calculate the liquidity ratio with several steps.

Table of Contents

Current Ratio

Current ratio is the simplest way to calculate liquidity ratios compared to other methods. This calculation is intended to determine the level of the company’s ability to meet its short-term obligations with liquid company assets or current assets (current assets).

This type of asset is an asset that can be exchanged for cash within one year. The current ratio calculation formula is as follows:

Current assets: Current liabilities

For example a company has a current asset of IDR 10,000,000 and a current liability of IDR 5,000,000, so the company’s current ratio is

10,000,000: 5,000,000 = 2.0

If the current ratio of a company is more than 1.0 times, then the company has good ability to pay off its obligations. Because the ratio of assets is greater than the liabilities they have. But if the company’s current ratio is below 1.0 times, then its ability to pay off debt is still questionable.

In addition, if a company’s current ratio is more than 3.0, it does not mean that the company is in good financial condition. It could be that the company did not allocate its current assets optimally, did not utilize its current assets efficiently, and did not manage their capital well.

Quick Ratio

Quick ratio is a further explanation of the current ratio. Quick ratio calculation only uses the most liquid current assets to compare with current liabilities. Inventory is not included in the quick ratio calculation because it is difficult to exchange with cash, so the quick ratio is much tighter than the current ratio. The quick ratio calculation method is:

Quick ratio = (current assets – inventory): current debt

For example, the Maju Jaya company has current assets of Rp. 20,000,000, inventory of Rp. 2,000,000 and current liabilities of Rp. 6,000,000. Then the fast ratio is

(Rp. 20,000,000 – Rp. 2,000,000): Rp. 6,000,000,000 = 3.0

The quick ratio calculation results if more than 1.0, it shows a good company’s ability to meet its obligations. However, if the value is above 3.0 times, it does not mean that the company’s liquidity is good. The company may have a large amount of cash because it is not allocated anywhere so it is not productive.

Another reason is because of the high accounts receivable of the company. Quick ratio can be used as a better reference because it focuses on current assets that are easily converted into cash.

Cash Ratio
Cash ratio is a way of calculating liquidity that involves company cash. The benefits are similar to the current ratio and quick ratio, which is to find out the company’s ability to pay off its short-term obligations by making cash as a reference. Here’s how to calculate it:

Cash ratio = (cash + securities): current debt

For example, a company has cash valued at Rp 5,000,000, securities worth Rp 3,000,000 and current liabilities of Rp 5,000,000. Then the cash ratio is

(5,000,000 + 3,000,000): 5,000,000,000 = 1.6

Cash ratios are rarely used by companies because they are unrealistic and are not easy to maintain. The amount of excess cash available to companies that are able to cover current liabilities is often considered as unproductive cash that is not utilized properly.

5 types of items that are often used in calculating a company’s liquidity are, current assets, current debt, cash, securities, inventory. To find out the final value of the calculation of the 5 items, surely the company requires a careful and precise accounting recording process.

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