Liquidity Risk, Distinctions Between Asset Liquidity And Liability Liquidity Management Essay

Favorable liquidity ratios are critical to a company and its creditors within a business or industry that does not provide a steady and predictable cash flow. They are also a key predictor of a company’s ability to make timely payments to creditors and to continue to meet obligations to lenders when faced with an unforeseen event.

Liquidity Risk: The liquidity risk of Telstra can be analysed from the help of these two ratios

The liquidity of firm can be measured by computing certain ratio’s such as current ratio and acid ratio. For measuring Target Corporation’s 2014 liquidity; the firm’s current ratio and the acid ratio is computed. The company’s current ratio is 0.91 times which is computed by comparing current asset ($11, 573,000) with current liabilities ($12,777, 000) of the year 2014 (TGT Company Financial, n.d). The firm’s acid ratio is 0.26 times which is computed by deducting inventory ($8,278,000) from current assets. The inventory is deducted from current assets because the company has not received any money for the unfinished good or from unsold inventory worth ($8,278,000). To analyze the Target Corporation’s liquidity trend in 2014; the current ratio and acid ratio of 2014 is compared with the 2015’s ratios. In 2015, the firm’s current ratio was 1.20 times and the acid ratio was 0.45 times. These liquidity ratios reflect that the firm’s liquidity was better in 2015 than 2014. (See Table 1).

Liquidity ratios are the temporary capabilities of a business to compensate for its established requirements and unanticipated needs for cash. Suppliers and bankers are the short-term creditors who are mostly

Liquidity ratios are the measure of a company’s ability to meet its short term liabilities by converting its assets into cash without losing value. The results of the liquidity ratios depend on the outcome of Current ratio and quick ratio. In the appendix-I, in 2011 Target had better Current ratio

In liquidity management, corporations have for many years concentrated and notionally pooled cash balances domestically to maximise returns on balances and minimise expense. Globalisation and the euro prompted an increase in cross-border concentration. Now, treasurers can leverage target balancing, notional pooling and automated investment products to benefit from a streamlined, electronic global solution. These global liquidity management

We all know from our course that leverage and liquidity risks of financial institutions are vulnerable to the crisis. The financial crisis that emerged in 2007 had many and varied causes, but one of its most

In Liquidity Crises, Elul (2008) is talking about the most common factors that create financial meltdowns and what steps must be taken to prevent them. This is accomplished through looking at events that occurred in the summer of 2007. It is at this point that he examines how these causes were exacerbated and the best ways to address the challenges. This is providing the reader with a total understanding of the financial crisis and how the federal government should respond during these times. Together, these elements offer a total understanding the common signs of a liquidity crisis and the most effective strategies for addressing them. (Elul, 2008)

The reason of computing absolute liquid ratio is to eliminate accounts receivables from the list of liquid assets because there may be some doubt about their quick collection. The Absolute Liquid Ratio in 2003 showed that there are 0.113 cents worth of absolute liquid assets are considered sufficient for one dollar worth of current liabilities. While the Absolute Liquid Ratio in 2004 is considered very low compared with the previous year’s liquidity position. It is represent that only 0.0056 cents worth of absolute liquid assets are considered sufficient for one dollar worth of current liabilities.

The liquidity position of a company can be evaluated using several ratios which evaluate short-term assets and liabilities and a firm’s ability to settle short-term debts (Gibson, 2011). These ratios can provide insight into a firm’s ability to repay its debts in the short term (Gibson, 2011). In turn they suggest a firm’s capacity for debt-satisfying capabilities into the future (Gibson, 2011). This paper will use financial statement data as cited in Gibson (2011) from 3M Company (3M) to better understand liquidity measures to evaluate a firm’s total liquidity position. The following paper will focus on various liquidity calculations, their meaning, and their interpretation relative to 3M. Finally, an overall view of 3M’s liquidity

Banks may not be able to provide liquidity in a financial crisis. The reason for this is that a bank-centered crisis may lead investors to concern about the safety of bank deposits, even with deposit insurance. Therefore,

Liquidity refers to the availability of cash in the near future after taking account of immediate financial commitments (also known as current liabilities). Cash in the near future will be available from bank deposits, cash released by sale of stocks and cash collected from customers. Immediate financial commitments are shown in current liabilities. The first ratio of liquidity is the current ratio, which is a simple comparison of current assets with current liabilities.

Liquidity ratios measure a business ' capacity to pay its debts as they come due. It also measures the cooperative’s ability to meet short-term obligations. Liquidity refers to the solvency of the firm’s overall financial position – the ease with which it can pay its bills. Because a common precursor to financial distress and bankruptcy is low or declining liquidity, these ratios can provide early signs of cash flow problems and impending business failure. The two basic measures of liquidity are the current ratio and the quick (acid test) ratio (Gitman, 2009).

This chapter is about the background of 2007-2008 financial crisis. The 2007-2008 financial crisis has a huge impact on US banking system and how the banks operate and how they are regulated after the financial turmoil. This financial crisis started with difficulty of rolling over asset backed commercial papers in the summer of 2007 due to uncertainty on the liquidity of mortgage backed securities and questions about the soundness of banks and non-bank financial institutes when interest rate continued to go up at a faster pace since 2004. In March 2008 the second wave of liquidity loss occurred after US government decided to bailout Bear Stearns and some commercial banks, then other financial institutions took it as a warning of financial difficulty of their peers. In the meantime banks started hoarding cash and reserve instead of lending out to fellow banks and corporations. The third wave of credit crunch which eventually brought down US financial system and spread over the globe was Lehman Brother’s bankruptcy in August 2008. Many major commercial banks in US held structured products and commercial papers of Lehman Brother, as a result, they suffered a great loss as Lehman Brother went into insolvency. This panic of bank insolvency caused loss of liquidity in both commercial paper market and inter-bank market. Still banks were reluctant to turn to US government or Federal Reserve as this kind of action might indicate delicacy of

Assets come in many forms, differentiating in their liquidity. Liquidity, by definition, is how easy an asset can be traded (Hertrich, 2015). Different assets have different abilities to be traded, cash being the easiest; hence cash is the most liquid asset. This causes price differentiation, where more liquid assets have higher price tags and lower trading costs (Hertrich, 2015). This makes more liquid assets more attractive for investors. When assets have low liquidity there are risks involved for investors because there is a chance that the asset cannot be turned into cash when needed. Liquidity risk calculates the difficulty of selling an asset in return for cash (Currie, 2011). Liquidity risk is associated with low liquidity; hence there is a negative relationship between liquidity and liquidity risk (Hertrich, 2015). This implies that the higher the liquidity risk of the asset, the less the possibility the asset can be traded.