Liquidity Analysis Using Cash Flow Ratios and Traditional Ratios: The Telecommunications Sector in Australia

Abstract

Purpose - The purpose of this study is to examine the value in analysis of the liquidity of companies using the traditional ratios as compared to the more recently devised cash flow ratios. Design/methodology/approach - The research involved the comparison between the traditional ratios and cash flow ratios of twenty five companies in the same industry over a five year period. The companies were all from the telecommunications sector and the data was obtained from the FinAnalysis database. The ratios examined were - the current ratio, quick ratio, interest coverage ratio - the cash flow ratio, critical needs cash coverage ratio, and cash interest coverage ratio. Findings - The study revealed that differences existed between the traditional liquidity ratios and the cash flow ratios. A conclusion based solely on the traditional ratios could well have lead to an incorrect decision regarding the liquidity of a number of companie. In ceratin instances that may have been that a company was deemed to be liquid when it faced cah flow problems or that a company was not liquid when in fact it had sufficient cash flow resources. Research limitations/implications - The results support the proposition that analysis based on the traditional liquidity ratios is best compared against the cash flow ratios before reaching any conclusions regarding the financial liquidity position