Accounting liquidity


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Accounting liquidity

The ease and quickness with which assets can be converted to cash.

Accounting Liquidity

A measure of a company's ability to meet its short-term obligations using its most liquid assets. That is, accounting liquidity is the ease with which a company can pays its bills and liabilities over the next year, especially if it must convert its assets into cash in order to do so. Two common ways to measure accounting liquidity are the current ratio and the quick ratio.
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In accounting terms, what is discussed in the literature is a possible trade-off between accounting liquidity and profitability caused by the assumption that companies that carry more liquid assets would be less apt to generate greater accounting returns for shareholders (commonly defined as net income per unit of net equity, or return on equity, or simply ROE).
This author explores the accounting liquidity and accounting returns relationship for a business, elaborating a theory on working capital that postulates that accounting profitability would be a function of the ratio between working capital held and fixed capital.
There are, however, authors such as Chan (2010) who argue in favor of a positive relationship between accounting liquidity and profitability in a context of financial constraint, consistent with the idea postulated by Hirigoyen (1985) and verified both by Baghiyan (2013) and by Ding, Guariglia, and Knight (2010) for developing markets.
In Brazil, Pimentel (2008) found a positive relationship between accounting liquidity and profitability in the long run.
Following on from the paper by Pimentel (2008), Vieira (2010) also sought to verify whether there was a negative relationship between accounting liquidity and profitability in the short run, and a positive one in the long run.
They concluded that, in the medium to long run, there was, in fact, a positive relationship between liquidity and profitability; that is, companies with low accounting profitability would also be those with low accounting liquidity, which would again contradict a potential trade-off between liquidity and return on the accounting level.
Fleuriet, Kehdy, and Blanc (2003) argue that in order to define excess accounting liquidity, i.
Therefore, it would be interesting to verify not only the relationship between market liquidity and market risk/ expected return and between accounting liquidity and accounting return, but also cross-relationships between the four indicators.
2012) observe that papers such as those from Chordia, Roll, and Subrahmanyam (2007) and Foley, Hartzell, Titman, and Twite (2007) show a simultaneous growth in market liquidity and in the accounting liquidity of firms in a context of constraint.
2012) is that there is a relationship between accounting liquidity and market liquidity, but that this relationship may be both positive and negative.
Almeida and Eid (2014) also remind us that for financially constrained companies, greater accounting liquidity can increase the likelihood of firms implementing projects with positive net present value, which would be abandoned under the hypothesis of not maintaining accounting liquidity.
Combined with positive balance between A/R and A/P, it allowed EuroChem to increase cash volumes on its accounts more than twice, which considerably improved the company's accounting liquidity.