Degree of Relative Liquidity (DRL)
What is the Degree of Relative Liquidity?
The degree of relative liquidity (DRL) is a liquidity metric that looks at a company's ability to support short-term expenditures. The degree of relative liquidity is determined by taking a gander at the total percentage of cash a company has close by.
The cash must be earned through customary operations and able to be spent on expenses and short-term debt obligations through a specific period. Companies that have a higher degree of relative liquidity will most likely have less difficulty in recovering funds for payments.
Figuring out the Degree of Relative Liquidity (DRL)
Likewise with all liquidity metrics, indications that a company is scarcely able to make short-term payments can be a sign the company could be facing serious financial issues in the long term. Financial distress because of the inability to make debt payments could lead to bankruptcy.
The degree of relative liquidity is like the current ratio. The two measures offer an indication of the relative straightforwardness with which cash flow or assets can be utilized to fulfill liabilities.
Cash flow from normal operations is somewhat subjective in nature. Various organizations will and ought to perceive revenue sources in an unexpected way. For instance, a gadget manufacturer shouldn't perceive income from ancillary sources — like the sale of a resource — as ordinary or standard revenue. Though a gallery which charges admission however runs a gift shop will perceive revenues from merchandise sales, as this would be viewed as part of a common operating model for a historical center.
This means no two industries (and at times even companies from a similar industry) have a similar revenue recognition and expense recognition methods. Subsequently, it wouldn't be unusual for an analyst to change financial things to standardize the degree of relative liquidity ratio.
Past standard internal choices, on occasion —, for example, during an economic log jam — outer factors can lead to a deterioration in financial conditions at a company. This thusly can debilitate a company's degree of relative liquidity, even however this is to a great extent out of the control of management.
Features
- The degree of relative liquidity is a metric that looks at a company's ability to pay close term expenses.
- Investors ought to keep an eye on liquidity metrics, as they show whether a company could be facing long-term financial issues.
- The degree of relative liquidity is like current ratio, as both measure the simplicity in which a company's cash flow or assets can be utilized to fulfill liabilities.
