Liquidity analysis using cash flow ratios and traditional ratios

Kirkham – Volume 10, Issue 1
(2012)

Journal of New Business Ideas & Trends
2012, 10(1), pp. 1-13.
””

Liquidity Analysis Using Cash Flow Ratios
and Traditional Ratios: The
Telecommunications Sector in Australia
Ross Kirkham
School of Business
Faculty of Arts &
Business
University of the Sunshine Coast, Queensland,
Australia Email:

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.
Keywords: Liquidity ratios, cash flow ratios, financial statement analysis.
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Introduction
The global financial crisis has reignited the concern over the liquidity of
businesses in general, banks in particular and more importantly countries. Of
the various methods for monitoring liquidity of businesses the most common
has been the use of financial ratios.
Traditionally the current ratio and the quick (acid test) ratio were used to
analyses the short term liquidity of a business. However, these ratios relied
exclusively on the values derived from the Statement of Financial Position, also
known as the Balance Sheet, and were not always reliable due to the vagaries
of accounting measurement of the values of assets and accrual accounting. In
order to overcome the problems associated with accrual accounting and to
provide a more specific focus on the cash position of a business the Australian
accounting profession introduced the Statement of Cash Flows. This resolved

the lack of detail concerning cash flow and also provided for the creation of a
new set of ratios which could be used to analyse the liquidity of a business.
Since the introduction of the Statement of Cash Flows a number of
ratios have been developed and their use can best be described as evolving.
Certainly a limited number of these new cash flow ratios have been included in
first year accounting text books.
However, their use and value in terms of the analysis process has received very
limited attention. In deed little has been done to incorporate these into any of
the existing models that are used for predicting business failure. The literature
contains minimal research where such ratios have been included in an effort to
broaden the model or address the limitations that had been associated with the
dependence on the values contained in the Statement of Financial Position.
The telecommunications sector has undergone a number of changes as a
result of the emergence of new technologies the demand to keep pace with
these changes has in turn meant that firms have had to invest heavily in order
to remain competitive (Berg, 2004). In the case of the Australian
telecommunications sector there have been a number of siginificant
developments that have emphasised the need for vigilance over the cash flow of
firms. The sector has been involved in major upgrades to infrastructure and
increased competition from both international firms and more recently new
technology linked to the internet (More & McGrath, 1999). The impact of these
changes has placed a greater emphasis on the need for working capital and
liquidity. The collapse of OneTel was a prime example of a firm that failed to
pay sufficient attention to its liquidity and in particular its cash flow ( Anderson &
Davis,2009). Thus the telecommunications sector provides an ideal area for
examining the relevance of the cash flow ratios against the traditional ratios.
This paper seeks to address the gap in the literature by demonstrating
the usefulness of the cash flow ratios as a means of clarifying the findings of the
traditional liquidity ratios. To that end the paper is concerned with only the
short-term liquidity ratios and their place in the analysis process.

Literature review
The current ratio and the quick ratio rely on the values identified as
current assets and current liabilities in the Statement of Financial Position. The
© JNBIT Vol.10, Iss.1
(2012)

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Kirkham – Volume 10, Issue 1
(2012) assets by the
current

current ratio is simply determined by dividing the total
total current liabilities to arrive at a ratio between the two amounts. The quick
ratio provides a more narrow focus and is concerned with only those items
otherwise included in the total current assets such as cash, marketable
securities, and accounts receivable. This reduced amount is divided by the total
current liabilities to provide a ratio between the two amounts. The analysis in
very simple terms relies on the ratio being an indicator of the ability to pay for
every dollar that is

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currently liable. Industry benchmarks are considered to be a valuable guide to
the analysis process however, where these are not available a rule of thumb is
generally used. As part of this resaerch an industry standard on an annual
basis will be calculated and included for analysis purposes.
There are a number of ratios which also assist in the process of
evaluating the liquidity position of a business. The most common are the
accounts receivable turnover ratio, the inventory turnover ratio and the interest
coverage (or interest earned) ratio. For the purpose of this paper the interest
coverage ratio is used as a comparative cash flow ratio exists.
From the Statement of Cash Flows there a number of ratios which may
be juxtaposed to the traditional ratios in order to obtain a comparative
perspective. For the purpose of this paper the focus will be on the ratios that
are most comparable with regards to the short term liquidity analysis and they
are specifically, the cash flow ratio, critical needs cash coverage ratio, and
cash interest coverage ratio. These ratios share some attributes which are
similar to the traditional ratios and have thus been given names that indicate
their similarity.The details of the ratios are presented in Table 1.
Table 1: Comparison of Ratios
Ratio

Traditional Ratios
Formula

Current
ratio
Quick
ratio
(Acidtest)

Interest
Coverag
e

Total Current Assets
Total Current Liabilities
Total Current Assets — Inrentories — Prepayments
Total Current Liabilities
Net Operating Profit + Interest + Tax (EBIT)
Annual Interest

Ratio
Cash
Flow
ratio
Critical
needs
cash
coverage
Cash
Interest
Coverage

Cash Flow Ratios
Formula
Net Operating Cash Flow
Total Current Liabilities
Net Operating Cash Flow + Interest paid
Total Current Liabilities + Interest
Net Operating Cash Flow + Interest +

Tax Annual Interest

There exists a well established literature on the nature and
interpretation of the various ratios and as such it is not the intention of this
paper to provide an indepth discussion as to the interpretation of each and
every ratio1. Rather the focus of the paper is on providing a basis by which the
traditional ratios may be compared against the ratios eminating from the
statement of cash flows.

Research method
The method used in this study is based upon the approaches employed
in prior research (Bell, 2001; Rahmatian & Cockerill, 2004). The research
involved the comparison between the ratios of companies in the same industry
over a five year period. The data for the five year period were obtained from
the FinAnalysis database. There were thrity seven
(37) firms in the data set, however eleven (12) were excluded as they did not
have data for all the years being examined, the number of firms in the study are
therefore 25. The names of the remaining twenty five firms in the final data set
are provided in Table 2.

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1

Most accounting text books provide a valuable source for interpretation of traditional and some cash flow
ratios – see for example Hogett et al (2011) and Horgren et al. (2011). There are also text books which
specifically address financial ratios – see for example Gibson (2009) and Laing (1996).

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Table 2: List of Telecommunication Companies
Abbreviation Name
AMM

Amcom Telecommunications Limited

BGL

Bigair Group Limited

BRO

Broad Investments Limited

EFT

Eftel Limited

ENG

Engin Limited

FRE

Freshtel Holdings Limited

HTA

Hutchison Telecommunications (Australia)

Limited IIN

iiNET Limited

IPX

Intrapower Limited

MAQ

Macquarie Telecom Group Limited

MNF

My Net Fone Limited

MNZ

Mnet Group Limited

MTU

M2 Telecommunications Group Limited

NBS

Nexbis Limited

NWT

Newsat Limited

QUE

Queste Communications Limited

REF

Reverse Corp Limited

SDL-NZ

Solution Dynamics Limited

SGT

Singapore Telecommunications Limited

TEL-NZ

Telecom Corporation of New Zealand

Limited TLS

Telstra Corporation Limited

TPC

Tel. Pacific Limited

TPM

TPG Telecom Limited

TTK-NZ

TeamTalk Limited

VOC

Vocus Communications Limited

Results
The ratios are presented on a company by company basis given that
there are five years worth of ratios. The comparative analysis is concerned
with identifying trends and indications of differences between the traditional
ratios and the cash flow ratios.

AMM - Amcom Telecommunications Limited

Current Ratio
Cash Flow Ratio
Quick Ratio
Critical needs coverage
Interest Cover
Cash interest coverage

2007
0.6
0.59
0.54
0.57
34.99
30.93

2008
1.04
1.29
0.96
1.19
13.53
17.06

2009
1.06
0.96
1
0.88

11.43
12.69

2010
1.27
0.95
1.21
0.88
32.7
15.77

2011
3.45
1.17
3.38
1.10
23.81
20.34

Comment – Whilst the traditional ratios and the cash flow ratios were
intially very close the differences become apparent in 2011. Note that the
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cash flow ratios show a weaker short term liquidity

© JNBIT Vol.10, Iss.1

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BGL - Bigair Group
Limited

Current Ratio
Cash Flow Ratio
Quick Ratio
Critical needs coverage
Interest Cover
Cash interest coverage

2007
1.24
‐0.17
1.22
‐0.17
12.79
‐66.03

2008
1.17
0.04
1.16
0.04
28.26
‐‐

2009
1.74
1.37
1.74
1.37
‐14.73
‐‐

2010
1.4
1.47
1.4
1.47
‐‐
‐‐

2011
0.91
1.12
0.91
1.12
‐39.73

531.24

Comment – In this company the cash flow ratios show a better liquidity
position than is indicated by the traditional ratios.

BRO - Broad Investments Limited

Current Ratio
Cash Flow Ratio
Quick Ratio
Critical needs coverage
Interest Cover
Cash interest coverage

2007
4.21
‐1.32
4.21
‐1.27
‐216.56
‐34.94

2008
0.86
‐0.03
0.6
‐0.03
23.23
‐47.78

2009
1.07
‐0.05
0.65
‐0.05
411.9
‐38.27

2010
1.65
0.33
1.65
0.32
8.56
14.63

2011
1.16
‐0.27
1.16
‐0.27
7.79
‐19,339

Comment – In this company the cash flow ratios show a weaker liquidity
position than is indicated by the traditional ratios.

EFT - Eftel Limited
Current Ratio
Cash Flow Ratio

Quick Ratio
Critical needs coverage
Interest Cover
Cash interest coverage

2007
0.59
0.18
0.59
0.17
‐98.5
17.88

2008
0.49
0.15
0.49
0.15
10.66
11.85

2009
0.48
0.04
0.48
0.04
‐8.14
2.49

2010

0.42
0.05
0.42
0.05
‐2.61
1.12

2011
0.54
‐0.04
0.54
‐0.04
‐‐
‐24.31

Comment – In this company the cash flow ratios show a weaker liquidity
position than is indicated by the traditional ratios. Noteably the trend indicates
that the cash flow position was deteriorating.

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ENG - Engin Limited
Current Ratio

Cash Flow Ratio
Quick Ratio
Critical needs coverage
Interest Cover
Cash interest coverage

2007
1.94
‐1.42
1.84
‐1.39
26.56
‐57.66

2008
1.61
‐2.62
1.48
‐2.32
‐28.76
‐19.22

2009
1.35
‐0.29
1.31
‐0.29
43.27
‐13.71

2010
1.64
0.18
1.58
0.18
18.88
23.81

201
1

Comment – In this company the cash flow ratios show a weaker liquidity
position than is indicated by the traditional ratios. Althought the trend is clearly
that the liquidity was improving.
FRE - Freshtel Holdings Limited

Current Ratio
Cash Flow Ratio
Quick Ratio
Critical needs coverage
Interest Cover
Cash interest coverage

2007
11.31
‐3.95
11.19
‐3.92
10.93
‐562.00

2008
5.7
‐3.09
5.59
‐3.07
11.41
‐707.88

2009
3
‐5.50
3
‐5.47
43.74
‐1,422.99

2010
2.37
‐7.28
2.36
‐6.67
‐421.86
‐84.51

2011
0.65
‐1.83
0.63
‐1.71

‐85.74
‐37.93

Comment – In this company the cash flow ratios show a weaker liquidity
position than is indicated by the traditional ratios. Noteably the trend indicates
that the cash flow position was however improving.
HTA - Hutchison Telecommunications (Australia) Limited

Current Ratio
Cash Flow Ratio
Quick Ratio
Critical needs coverage
Interest Cover
Cash interest coverage

2007
0.6
‐0.05
0.46
‐0.04
‐0.8
0.98

2008
0.32
0.24
0.29
0.23
‐0.72
5.48

2009
0.23
‐1.47
0.23
‐1.46
3.04
‐1,102.39

2010
0.04
0.00
0.04
0.00
‐1.87
3.42

2011
0.03
0.01
0.03
0.01
16.56
14.18

Comment – In this company the cash flow ratios show a weaker liquidity
position than is indicated by the traditional ratios. Noteably the trend indicates
that the cash flow position was however improving.

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IIN - iiNET Limited
Current Ratio
Cash Flow Ratio
Quick Ratio
Critical needs coverage
Interest Cover
Cash interest coverage

2007
1.04
0.52
1.03
0.48
16.77
7.99

2008
0.5
0.76
0.49
0.74
366.06

43.51

2009
0.57
0.60
0.56
0.58
18.36
25.82

2010
0.48
0.65
0.47
0.64
18.63
31.35

2011
0.56
0.91
0.52
0.84
9.35
13.49

Comment – In this company the cash flow ratios show a stronger
liquidity position than is indicated by the traditional ratios. Noteably the trend
indicates that the cash flow position was improving in contrast to the
traditional ratios which reflect an decrease over the period.

IPX - Intrapower Limited
2007
Current Ratio
Cash Flow Ratio
Quick Ratio
Critical needs coverage
Interest Cover
Cash interest coverage

2008
1.02
0.24
1.01
0.21
4.99
2.68

2009
1.17
0.45
1.15
0.36
‐4.74
3.95

2010
1.3
0.63
1.28

0.53
1.66
4.68

2011
0.93
0.40
0.91
0.34
‐0.5
3.26

Comment – In this company the cash flow ratios show a weaker liquidity
position than is indicated by the traditional ratios. Noteably the trend for both
the traditional ratios and the cash flow ratios indicate a decline over the period.

MAQ - Macquarie Telecom Group Limited

Current Ratio
Cash Flow Ratio
Quick Ratio
Critical needs coverage
Interest Cover
Cash interest coverage

2007
1.26
0.31
0.9
0.30

‐44.1
15.08

2008
1.24
0.42
1.24
0.41
5.39
24.26

2009
1.49
0.65
1.49
0.65
‐11.63
69.53

2010
1.93
0.72
1.93
0.71
‐6.9
155.79

2011
1.75
0.97

1.75
0.97
‐7.17
2,555.39

Comment – In this company the cash flow ratios show a weaker liquidity
position than is indicated by the traditional ratios. However the interest
coverage is noteably stronger in the cash interest covergae ratio over the
period.

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MNF - My Net Fone
Limited

Current Ratio
Cash Flow Ratio
Quick Ratio
Critical needs coverage
Interest Cover
Cash interest coverage

2007
0.73
‐0.84
0.73
‐0.84
74.89
‐141.87

2008
0.4
‐0.26
0.4
‐0.26
59.78
‐72.95

2009
0.49
0.11
0.49
0.11
‐6.39
26.39

2010
0.69
0.25
0.69
0.25
‐26.41

44.76

2011
0.86
0.34
0.86
0.33
‐11.02
62.84

Comment – In this company the cash flow ratios show a weaker liquidity
position than is indicated by the traditional ratios. However the interest
coverage provides a different perspective with a reverse situation between the
cash interest covergae ratio and the interst covergae ratio over the period.
MNZ - Mnet Group
Limited

Current Ratio
Cash Flow Ratio
Quick Ratio
Critical needs coverage
Interest Cover
Cash interest coverage

2007
4.47
0.00
4.47
0.00
‐‐

‐‐

2008
1.49
‐0.08
1.49
‐0.08
20.75
1.25

2009
1.45
‐0.26
1.45
‐0.26
14.54
‐33.71

2010
1.2
‐0.37
1.2
‐0.37
31.24
‐84.12

2011
1.8
0.53
1.8

0.52
‐35.58
93.82

Comment – In this company the cash flow ratios show a weaker liquidity
position than is indicated by the traditional ratios. Noteably the trend for both
the traditional ratios and the cash flow ratios indicate a decline over the period.

MTU - M2 Telecommunications Group Limited

Current Ratio
Cash Flow Ratio
Quick Ratio
Critical needs coverage
Interest Cover
Cash interest coverage

2007
0.9
0.28
0.9
0.28
‐15.86
302.20

2008
1.06
0.26
1.05
0.26

94.66
28.97

2009
0.84
0.11
0.81
0.11
23.86
16.51

2010
1.18
0.20
1.18
0.19
13.17
9.55

2011
0.88
0.47
0.87
0.46
52.34
24.67

Comment – In this company the cash flow ratios show a weaker liquidity
position than is indicated by the traditional ratios. Noteably the trend in the
cash flow ratios indicates an improvement over the period.

© JNBIT Vol.10, Iss.1
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NBS - Nexbis Limited
Current Ratio
Cash Flow Ratio
Quick Ratio
Critical needs coverage
Interest Cover
Cash interest coverage

2007
2.44
0.30
2.44
0.30
32.59
156.71

2008
1.39
2.05

1.39
1.91
‐101.98
34.55

2009
9.81
2.25
9.81
1.98
‐393.7
21.45

2010
0.82
1.72
0.82
1.47
‐1,238.35
13.87

2011
5.15
‐7.73
5.15
‐4.00
‐56.77
‐5.06

Comment – In this company the cash flow ratios show a weaker liquidity

position than is indicated by the traditional ratios. Noteably the trend for both
the traditional ratios and the cash flow ratios indicate a decline over the period.

NWT - Newsat Limited
Current Ratio
Cash Flow Ratio
Quick Ratio
Critical needs coverage
Interest Cover
Cash interest coverage

2007
0.67
‐0.56
0.59
‐0.45
‐2.61
‐2.06

2008
0.73
‐0.67
0.64
‐0.65
‐117.52
‐26.65

2009
0.76
0.00

0.69
0.00
‐8.61
‐0.09

2010
1.06
0.21
0.97
0.21
0.68
2,151.00

2011
1.12
0.07
1.07
0.07
‐3.91
50.39

Comment – In this company the cash flow ratios show a weaker liquidity
position than is indicated by the traditional ratios. Noteably the trend for both
the traditional ratios and the cash flow ratios indicate an improvement over the
period.

QUE - Queste Communications Limited

Current Ratio
Cash Flow Ratio

Quick Ratio
Critical needs coverage
Interest Cover
Cash interest coverage

2007
10.54
1.57
10.28
1.57
‐62.37
751.10

2008
31.68
‐0.72
31.45
‐0.71
12.74
12.36

2009
10.32
‐0.42
9.61
‐0.42
24.64
‐176.29

2010

27.78
‐0.50
26.35
‐0.49
0.56
‐24.17

2011
14.83
‐1.54
13.22
‐1.52
41.26
‐162.90

Comment – In this company the cash flow ratios show a weaker liquidity
position than is indicated by the traditional ratios. Noteably the trend in the
cash flow ratios indicates a decline over the period.

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REF - Reverse Corp

Limited

Current Ratio
Cash Flow Ratio
Quick Ratio
Critical needs coverage
Interest Cover
Cash interest coverage

2007
1.78
2.34
1.77
2.32
‐140.16
417.64

2008
1.55
2.89
1.54
2.84
‐99.83
266.77

2009
0.75
1.56
0.75
1.52

280.51
111.16

2010
1.1
2.02
1.1
1.92
40.31
52.97

2011
1.78
0.96
1.77
0.96
‐140.16
‐‐

Comment – In this company the cash flow ratios show a stronger
liquidity position than is indicated by the traditional ratios. Noteably the
trend in the cash flow ratios indicates a decline over the period.
SDL-NZ - Solution
Dynamics

Current Ratio
Cash Flow Ratio
Quick Ratio
Critical needs coverage
Interest Cover

Cash interest coverage

Limited

2007
0.61
0.14
0.58
0.12
‐2.09
2.63

2008
0.55
0.30
0.51
0.27
0.03
4.08

2009
0.72
‐0.06
0.67
‐0.05
‐0.48
0.26

2010
0.67

0.17
0.62
0.16
‐0.1
3.75

2011
0.79
0.24
0.76
0.23
2.29
5.69

Comment – In this company the cash flow ratios show a weaker liquidity
position than is indicated by the traditional ratios. Noteably the trend for both
the traditional ratios and the cash flow ratios indicate a decline over the period.
Further, the interest coverage provides a different perspective with the cash
interest covergae ratio indicating a better situation than the interst covergae
ratio over the period.

SGT - Singapore Telecommunications Limited

Current Ratio
Cash Flow Ratio
Quick Ratio
Critical needs coverage
Interest Cover
Cash interest coverage

2007
1.16
1.25
1.14
1.12
13.63
12.68

2008
0.7
0.95
0.68
0.89
14.22
15.73

2009
0.74
1.01
0.71
0.95
14.09
16.25

2010
0.75
0.78
0.7
0.74
15.53

17.49

2011
0.77
0.71
0.73
0.68
14.16
17.26

Comment – In this company the cash flow ratios show a slightly stronger
liquidity position than is indicated by the traditional ratios. Noteably the ratios
are closely approximated over the period.

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TEL-NZ - Telecom Corporation of New Zealand Limited

Current Ratio
Cash Flow Ratio
Quick Ratio
Critical needs coverage

Interest Cover
Cash interest coverage

2007
1.94
1.04
1.89
0.88
5.14
7.19

2008
0.81
0.74
0.79
0.66
7.41
7.55

2009
0.8
1.05
0.74
0.90
4.23
7.45

2010
0.79
1.24

0.75
1.09
4.07
9.68

2011
0.67
0.75
0.64
0.68
4.12
8.24

Comment – In this company the cash flow ratios show a slightly stronger
liquidity position than is indicated by the traditional ratios. Noteably the ratios
are closely approximated over the period.
TLS - Telstra Corporation Limited

Current Ratio
Cash Flow Ratio
Quick Ratio
Critical needs coverage
Interest Cover
Cash interest coverage

2007
0.57
0.90
0.53
0.81

5.32
8.86

2008
0.68
1.09
0.64
0.95
5.73
8.96

2009
0.8
1.16
0.77
1.03
7.29
11.01

2010
0.83
1.12
0.79
1.00
6.75
10.59

2011
0.87
0.94

0.84
0.82
5.02
7.55

Comment – In this company the cash flow ratios show a slightly stronger
liquidity position than is indicated by the traditional ratios. Noteably the ratios
are closely approximated over the period.

TPC - Tel. Pacific Limited
2007
Current Ratio
Cash Flow Ratio
Quick Ratio
Critical needs coverage
Interest Cover
Cash interest coverage

2008
1.14
0.29
1.13
0.29
‐3.19

2009
1.17
0.10
1.15
0.10

‐3.46

2010
1.04
0.10
1.03
0.10
‐2.71
12,443.60

2011
0.93
‐0.20
0.88
‐0.20
8.04
‐14,364.39

Comment – In this company the cash flow ratios show a weaker liquidity
position than is indicated by the traditional ratios. Noteably the trend for both
the traditional ratios and the cash flow ratios indicate a decline over the period.
Further, the interest coverage provides a different perspective with the cash
interest covergae ratio indicating a better situation than the interst covergae
ratio initially and then taking a steep decline in 2011.

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Kirkham – Volume 10, Issue 1
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TPM - TPG Telecom
Limited

Current Ratio
Cash Flow Ratio
Quick Ratio
Critical needs coverage
Interest Cover
Cash interest coverage

2007
1.75
0.28
1.72
0.26
3.67
6.51

2008
0.78
0.12
0.77
0.11
‐5.99
5.02

2009
0.51
1.02
0.51
0.94
3.94
14.94

2010
0.25
0.75
0.25
0.70
6.89
12.54

2011
0.27
0.79
0.27
0.70
5.14
7.54

Comment – In this company the cash flow ratios show a slightly stronger
liquidity position than is indicated by the traditional ratios. Noteably the ratios
are closely approximated over the period.
TTK-NZ - TeamTalk Limited
Current Ratio

Cash Flow Ratio
Quick Ratio
Critical needs coverage
Interest Cover
Cash interest coverage

2007
1.07
1.65
1.01
1.25
4.26
7.11

2008
0.77
0.96
0.69
0.76
3.49
5.47

2009
0.61
1.04
0.54
0.84
3.69
5.53

2010
0.56
0.93
0.49
0.83
5.07
9.41

2011
0.54
0.87
0.46
0.77
6.1
8.83

Comment – In this company the cash flow ratios show a slightly stronger
liquidity position than is indicated by the traditional ratios. Noteably the ratios
are closely approximated over the period.
VOC - Vocus

Communications

Current Ratio
Cash Flow Ratio
Quick Ratio
Critical needs coverage
Interest Cover
Cash interest coverage

Limited

2007
42.63
0.88
42.63
0.88
1.34

2008
32.29
‐0.58
32.29
‐0.58
0.47

2009
57.98
‐0.22
57.98
‐0.22
0.39

2010
1.08
0.38
1.08
0.37
16.27
17.20

2011
0.92
0.76
0.92
0.74
405.23
39.50

Comment – In this company the cash flow ratios show a stronger
liquidity position than is indicated by the traditional ratios.

Discussion
This study provides evidence of the importance of using the cash flow
ratios as a means of testing the validity of the conclusions that can be made
from analysis of traditional liquidity ratios alone. There were examples of
companies that had seemingly good traditional ratios and yet the cash flow
ratios projected a different perspective. In contrast
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Kirkham – Volume 10, Issue 1
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there were also companies that had seemingly poor traditional ratios and
the cash flow ratios provided a better perspective.

The analysis highlights the usefulness of the cash flow ratios in
conducting an investigation of the financial statements of companies. The
ratios used in this study represent but a few of the cash flow ratios that exist
and were selected for the purpose of making the comparison between the
traitional ratios more explicit. Further research may benefit from the provision
of a greater number of cash flow ratios as compared to a wider variety of
traditional ratios.
The implications of this study are that in essence the determination of
cash flow ratios provides a more wholistic approach to the analysis of the
liquidity position of companies and in doing so becomes a means for making
better decisions based on the data. For the purpose of the evaluation of
financial data the cash flow ratios provide a valuable means by which to justify
or question the relevance of the outcomes of traditional ratios.

Reference List
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the Effects of the Maximum Priority Proposal, Australian Journal of Management,
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Carslaw, C. & Mills, J. (1991). Developing Ratios for Effective Cash Flow Statement
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Figlewicz, R. & Zeller, T. (1991). An Analysis of Performance, Liquidity, Coverage, and
Capital Ratios from the Statement of Cash Flows, Akron Business and Economic
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Giacomino, D. & Mieke, D. (1993). Cash Flows: Another Approach to Ratio Analysis,
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Gibson, C. (2009). Financial Reporting & Analysis: Using Financial Accounting
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Gombola, M. & Ketz, J. (1983). A Note on Cash Flow and Classification Patterns of
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Kirkham – Volume 10, Issue 1
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Zeller, T. & Stanko, B. (1994). Operating Cash Flow Ratios Measure a Retail Firm’s “ability
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