Meeting short-term obligations
Liquidity ratios show a company’s ability to meet its short-term obligations. Liquidity ratios are important for creditors and the company’s management. The company’s liquidity position can be measured by using two liquidity ratios:
- Current Ratio – Current ratio is also known as the short-term solvency ratio or working capital ratio. It’s calculated by dividing current assets by current liabilities.
- Quick Ratio – Quick ratio is also known as liquid ratio or acid test ratio. It’s used to test a firm’s short-term solvency or liquidity position. It’s a more stringent liquidity measure than the current ratio. The quick ratio is calculated by dividing liquid assets by current liabilities. Liquid assets = total current assets – stock – prepaid expenses.
The above chart shows that Las Vegas Sands (LVS) maintained its ability to cover short-term obligations. It maintained its obligations despite investing in growth opportunities. Also, it wasn’t severely impacted by the economic downturn. However, its current ratio and quick ratio have declined compared to 2011. Click here to learn more about the growth in the gaming industry.
The above graphs also shows that the difference between current ratio and quick ratio has been minimized since 2010. This signifies the growing strength of LVS’s liquid assets. Liquid assets are needed to run the business.
The above chart shows that LVS is better in terms of liquidity—compared to MGM Resorts (MGM) and Boyd Gaming (BYD). However, LVS is poor compared to Melco Crown Entertainment (MPEL) and Wynn Resorts (or WYNN). MPEL has the strongest liquidity ratios among all of its peers. BYD has the weakest liquidity ratios. Exchange-traded funds (or ETFs), like the Consumer Discretionary Select Sector SPDR Fund (XLY), provide investors with exposure to these companies.