Liquidity ratios determine a company’s ability to meet its short-term obligations. A company’s liquidity position can be measured by using the following ratios:
- The current ratio (also known as the short-term solvency ratio or working capital ratio) is calculated by dividing current assets by current liabilities.
- The quick ratio (also known as the liquid ratio or acid test ratio) determines the liquidity position of a firm. This ratio is a more stringent measure of liquidity than the current ratio is.
Liquid assets are the total current assets minus stock-prepaid expenses.
The chart above shows that the current ratio for Pinnacle Entertainment (PNK) had declined severely to 0.7 as of September 30, 2014, from 2.9 as of December 31, 2012. The lower current ratio was mainly due to decreased assets from discontinued operations held for sale. This reduced current assets, thereby decreasing the current ratio.
PNK’s liquidity on a relative basis
As of September 30, 2014, PNK’s current and quick ratios were 0.7 and 0.5, respectively. This suggested that PNK could end up facing difficulties in meeting its short-term obligations. However, a low current ratio does not indicate a critical problem. A low current ratio is not necessarily bad, and a high current ratio is not necessarily good. An investor should take a company’s operating cash flows into account.
The chart above shows that both Caesars Entertainment (CZR) and Penn National Gaming (PENN) had higher current and quick ratios than PNK did as of September 30, 2014. The current and quick ratios for Boyd Gaming (BYD) were the lowest among the peer group.
Investors can hold diversified portfolios in these companies through ETFs like VanEck Vectors Gaming (BJK).