There are many ratios that can be calculated to make a good and exhaustive analysis of certain companies. Knowing the most important ones will be very useful when making decisions, they reflect the economic situation of said company. In this article we will talk about the availability ratio, explaining what is how it is calculated.
If you want to know more about this specific ratio, I recommend that you keep reading. It can help you find out more about the solvency capacity of a company, for example. In the end, what counts is finding out as much data as possible to make a decision when investing. The more we know about the economic state of a company, the better decisions we can make based on the risk involved.
What is the availability ratio?
In the world of economics and finance, it is essential to know and know how to calculate a few ratios to carry out a good analysis of companies and thus make important decisions. But what exactly are ratios? Well, they are very useful tools. to analyze the economic and financial situation of a given company. Thanks to the ratios, it is possible to know if a company has been managed well or badly. Through these calculations, we can create economic-financial projections with a good foundation in order to improve our decision-making. In turn, we also ensure improved inventory management.
Now, what is the availability ratio specifically? Well, this is the ratio that is normally used when we want to calculate the ability of a certain company to cover all its short-term debts. It is part of the ratios of solvency, whose main objective is to calculate the financial strength of the company in question when it comes to meeting its mandatory payments and debts.
In this case, the also known as the ordinary availability ratio focuses on the calculation of the company's ability to meet all its mandatory payments in the short term. In other words: The availability ratio helps us find out the difficulty or ease that a certain company has in meeting its obligatory payments in a period that is generally less than 365 days.
How is the availability ratio calculated?
Now that we know what the availability ratio is, let's see how it is calculated. Do not worry, it is a really simple task. Of course, there are a couple of details of the company's accounts that we must know in order to apply the formula. They are the following:
- Available assets of the company: The available assets of a company is the value with which the same account in cash to be able to face its obligatory payments and debts. In other words: It is the money that the company in question has immediately in its accounts. The available assets are part of the so-called current assets, but be careful, they are not the same. In the case of current assets, the so-called realizable assets are also taken into account. The latter is a set of assets that end up becoming an asset available in the short term for the company.
- Current liabilities of the company: Regarding current liabilities, this term refers to that part of the liabilities formed by debts and payments that must be paid in the short term, that is, in less than a year. Another name given to this data is “short-term demandable”. Be that as it may, both terms refer to all those debts that the company has that must be settled within 365 days.
Once we have obtained these two data, we only have to apply the formula to find out what the availability ratio is. You will see that it is very simple to carry out:
Availability ratio = available assets / current liabilities
Interpretation of the result
Very well, we now know what the availability ratio is and also how to calculate it. However, there is an important detail that we must comment on: How to interpret the result. Let's see what the numbers obtained mean:
- Result between 0,1 and 0,15: This would be an optimal result. It means that the company is capable of dealing with all its debts.
- Result less than 0,1: In this case, what the availability ratio tells us is that the company has very few resources to deal with all the debts it has. It is more: it could arrive at a situation of non-payment.
- Result greater than 0,15: If the availability ratio results in a figure greater than 0,15, it could mean that the company in question is not using all the resources it has well.
In the event that the result is higher or lower than optimal, it is important that we ask ourselves why this is so and carry out an exhaustive analysis, as it can be due to various causes. Some sectors tend to exceed the availability ratio, either below or above, at certain times. This is due to the nature of their business. An example would be those companies that usually make frequent payments to their suppliers, such as supermarkets. Its current liabilities are generally larger, since the payment of debts is usually short-term.
To conclude, we can therefore say that, whatever the ratio we are calculating, It is advisable to compare the data of the company in question with other companies belonging to the same sector. In this way we will find out if the result is normal or not. I also recommend that you compare the result obtained for the availability ratio with the history of the company. This way we can see how the management carried out in that company has been changing.
Be that as it may, the availability ratio is an excellent way of knowing if a company is solvent or if it is going to have problems paying its debts, at least in the short term. In the latter case, the company in question could suffer greatly on the stock market and also in the bond market.