What is the overall liquidity ratio
The overall liquidity ratio is a measure of a company’s ability to pay its liabilities with its assets. The overall liquidity ratio is calculated by dividing the total assets by the difference between the total liabilities and the contingent reserves. This ratio is used in the analysis of insurance companies, as well as in the analysis of financial institutions.
BREAKDOWN of the overall liquidity ratio
Regulators use financial metrics, such as the overall liquidity ratio, to determine whether an insurer, bank, or other financial company is healthy enough to cover its liabilities. Other similar parameters include the fast liquidity and current liquidity ratios. Rapid liquidity compares liabilities with readily available assets, including cash, short-term investments, government bonds and unaffiliated investments.
Finance and insurance companies use the cash generated from their activities to generate returns. A bank, for example, can mainly use deposits to provide mortgages and other loans. The balance of the deposits he has left can be kept in cash or invested in cash. Insurance companies are responsible for the benefits they guarantee by purchasing policies. Depending on the length of the policy, liability can last from a few months to a few years. Liabilities that end after one year are considered current liabilities.
The amount of money that the financial institution or insurer must keep available to cover the assets is determined by the regulatory authorities. Regulators examine liquidity ratios to determine whether the company is meeting its legal obligations. A low overall liquidity ratio could indicate that the financial or insurance company is in financial difficulty, whether due to poor operational management, risk management or investment management. A high overall liquidity ratio is not necessarily good either, especially if current assets represent a high percentage of total assets. A large proportion of current assets means that the company may not generate a sufficiently high return on assets because it may focus too much on liquidity.
Improved overall liquidity ratio
To be able to guarantee the security of business loans, most lenders are trying to improve their liquidity ratio by putting the facts in a balance sheet. This could indicate that a long-term loan, for example, might be a good strategy for improving the overall liquidity ratio. Other ways to improve the overall liquidity ratio include converting inventory to cash, postponing purchases, billing for previous pending orders, and evaluating a higher value at the end of the year.