Providing High Quality Liquid Assets ( Hqla )

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.

For centuries, banks have relied on fractional reserve banking. This is the method in which only a fraction of a bank’s deposits are actually backed by a reserve of cash-on-hand, available for immediate withdrawal. This procedure allows the bank more capital to lend and at the same time, grows the economy. The reserve amounts are determined by a ratio stipulated by the Federal Reserve. In theory, fractional reserve banking works most of the time. However, in difficult economic times, people have demanded to withdraw

Liquidity ratios "measure short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash" (Kimmel Weygandt, & Kieso, 2007, p. 74). The

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

“The short-term liquidity ratios are used in the evaluation of short-term liquidity to convert current assets into cash in order to reduce the financial obligations of the company as they become due” (Covee 2010 pg.45). These ratios are particularly significant to the creditors and potential lenders of a company because they determine the ability of that company to meet current payments of a debt.

Although the company’s liquidity ratios have dropped their ratios are still outperforming their RMA industry average by 15%. The decrease in the company’s liquidity ratios is the result of their current liabilities increasing 6.5% from fiscal year 2014 and their current assets only increasing 0.7% from fiscal year 2014. The company saw a decrease in cash and equivalents, accounts receivable, and income tax receivable in 2015. While also increasing accounts payable, accrued expenses, and deferred revenue and other liabilities. The combination of the movement in these accounts result in lower liquidity ratios for fiscal year 2015.

To evaluate whether the company can clear debts within one year from turning assets into cash, we need to check the current ratio of the company. A ratio which is less than one is often creates a concern. As we can see the current ratio of Costco (Exhibit 8) is 1.05 which is more than one and considered to be standard ratio, so Costco will not have any issues with liquidity

The current ratio is used to show if a business can raise enough money to pay the debts that it has.

Liquidity ratios measure the short term ability of a company to pay its obligations and meet their needs for maintaining cash. According to Cagle, Campbell & Jones (2013), “A good assessment of a company’s liquidity is important because a decline in liquidity leads to a greater risk of bankruptcy” (p. 44). Creditors, investors and analysts alike are all interested in a company’s liquidity. After computing liquidity

Liquidity ratios measure the ability of a firm to meet its short-term obligations. A company that is not able

Liquidity risk refers to the probability that a bank may not have sufficient funds with which to meet the demands for cash (or to make transfers on the part of customers). In addition, a bank is insolvent (has negative net worth) only if its total assets are insufficient to meet total liabilities. (bankofengland)

The liquidity ratios are a group of ratios that show the relationship of a firm’s cash and other current assets to its current liabilities. This basically means that the ratios measure how well the company is able to pay its short-term obligations and how well they can confront unexpected needs for cash.

“The new Basel III framework establishes higher liquidity requirements to ensure banks are better-equipped to absorb losses like those relating to the global financial crisis”. (Delimatsis & Panagiotis, 2012) Basel III promotes LCR (liquidity coverage ratio), ratio of high quality liquid assets(HQLA) to total net liquidity outflows over 30 days. Theoretically, banks whose LCR is more than 100 percent possess sufficient liquidity to withstand a month of elevated financial stress. (House, Sablik, & Walter, 2016)

Financial analysts usually have viewed the liquidity ratios like current ratio and quick ratio as key indicators of a firm 's liquidity performance. But, they fail to distinguish that the fundamental liquidity protection against unanticipated discrepancies in the amount and timing of operating cash inflows and outflows is provided by a firm 's cash reserve investments in conjunction with its unused borrowing capacity rather than by total current asset coverage of outstanding current liabilities. A concentration of current assets in the fewer liquid receivables and inventory forms possibly will generate an increasing current ratio reflecting a worsening capability by the firm to cover its current liabilities rather than an enhanced liquidity position for the firm (Richards & Laughlin,1980). Ruback (2003) in his study showed that Dell and