Operating Liquidity Ratio

Having stressed the weaknesses of the traditional ratios (current ratio & quick ratio),

we propose 2 liquidity ratios using the fundamental concepts derived from the Cash Flow Statement of the company : the operating liquidity ratio & the total liquidity ratio.

Operating liquidity = Operating cash flow Sales

How much, per € of sales, are the operations of the firm generating in cash ?

This ratio shows also the impact that fast growing sales may have on the cash flow provided by operations.

Example :

Click here to see the source of data

Starworld Group	2022	2023
Profit after Tax	450	715
Depreciation	350	400
IGF (Internally Generated Funds)	800	1115
Variation of WCR (*)	- 18	- 102
Operating Cash Flow	782	1013
Sales	3341	4343
Operating liquidity ratio	0.234	0.233

 

Sources :

Interpreting and using financial statements, 1999, Marc Bertonèche, Ph. D. in Finance from the Northwestern University, Professor at the Bordeaux University and at Sciences-PO Paris, Visiting Professor at Harvard Business School and Oxford University.

Corporate Finance Course, Bernard Jaquier, Professor in Economics & Finance, Lausanne, Switzerland, 2024