There are lots of measures of liquidity. The classics are the current ratio and the quick ratio, but they've fallen out of favor because they don't include cash flow, a critical component of liquidity. Cash burn is too recent to be classic, even though it's been around for a while. But it's limited to on-balance-sheet sources of liquidity.
The liquidity position is the latest addition to the liquidity analysis toolkit. It has limitations, but we like it because it includes internal and external sources of funds. Here's a short slide show about it.
Wednesday, November 18, 2009
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2 comments:
I've never really understood the attraction of current and/or quick ratios. A company which is improving its working capital management would show a deteriorating ratio?!? These ratios seem to be akin to a debenture formula that might be linked to an overdraft, e.g. your overdraft needs to be covered 2x by debtors.
I completely agree. The current and quick ratios are perverse. And never more than when used financial covenants.
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