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LIQUIDITY PERFORMANCE PARAMETERS

Prof. N. C. Kar

LIQUIDITY PERFORMANCE PARAMETERS


Liquidity

is the ability of the from to meet its cash obligations

as and when they are due


Liquidity

has 3 basic ingredients

timing an asset takes to be converted to cost amount of cash that would be available cost of converters if any or cost of arranging cash to meet

obligations

Liquidity may also be viewed as ability to augment future cash flows to cover any unforeseen needs or to take advantage of unforeseen opportunities

This extended concept of liquidity is often referred to

as financial flexibility

Traditionally liquidity was viewed as coverage for

liabilities by mostly current assets

Such measures really addresses the solvency of a firm

MEASURES OF LIQUIDITY

Stock measures Flow measures

STOCK MEASURES
Uses balance sheet data and relate between current assets and current liabilities.

Current ratio
Quick ratio Net Liquid ratio Difference between current financial assets such as cash and marketable securities and current discretionary and

non spontaneous financial liabilities such as notes payable,


current maturities of long term debt or leases etc.

NLB = cash and its equivalents Notes payable and current

maturities of long term debts


When the measure is negative, there is a dependence on

outside financing and reduced financial flexibility.


Net Liquidity Ratio
CASH MARKETABLE SECURITIES UNUSED NLR CREDIT LINES - TRADE & EXPENSE CREDITORS TOTAL ASSETS

Ability to pay up immediately the most liquid liabilities of the firm.

FLOW MEASURES
Debtors Turnover Ratio (DTR)
Inventory Turnover Ratio (ITR) WC Turnover Ratio (WCTR) Net Liquidity Ratio

CASH MARKETABLE SECURITIES UNUSED CREDIT LINES - TRADE & EXPENSE CREDITORS NLR TOTAL ASSETS
Measures ability of the firm to pay up immediately most liquid liabilities of the firm.

OTHER MEASURES
Current Liability Index
(CASH ASSETS) t - 1 (CASH FLOW FROM OPERATIONS ) t (NOTES PAYABLE) t - 1 (CURRENT MATURING DEBT) t

CLI

A declining index signals potential liquidity problems.

LAMBDA
The uncertainty of future cash flows that substantially affects a firms liquidity captured by the measure lambda.
LAMBDA LIQUIDITYRESOURCES EXPECTED CASH FLOWS UNCERTAINITY OF CASH FLOWS

Liquid Resources = Cash + Marketable Securities + Unused Credit Lines Expected Cash Flow = Net Cash Flow i.e. Net OCF + NFF + NIF Uncertainty is the standard deviation of operating cash flows over some past years. Higher standard deviation means smaller lambda and higher risk of illiquidity.

SURVEY FINDINGS
Managers perceive and give importance to monitoring of receivables, inventory and short term cash flow projections as the most important factors for monitoring liquidity. Traditional ratios were considered weak predictions of sickness and weak measures of liquidity.

New measures were found to be more effective in


measuring liquidity.

Finally important factors for liquidity analysis are considered to be: Amount and trend of international cash flows Aggregate time of credit and degree of usage Attractiveness of investors of the firms commercial papers, long term bonds, etc. Overall expertise of management.