Liquidity ratios and short-term obligations
Liquidity ratios determine a company’s ability to meet its short-term obligations. The liquidity position of the company can be measured mainly by using two liquidity ratios.
- Current Ratio. Also known as the short-term solvency ratio or working capital ratio, current ratio is calculated by dividing current assets by current liabilities.
- Quick Ratio. Also known as liquid ratio or acid test ratio, quick ratio determines the liquidity position of a firm and is a more stringent measure of liquidity than the current ratio since this ratio is calculated by dividing liquid assets by current liabilities.
Liquid assets = Total current assets – stock- prepaid expenses.
The above chart shows that Wynn Resorts’ (WYNN) current and quick ratios greatly improved to 2.6 and 2.3, respectively, as of September 30, 2014, when compared to 2.0 and 1.8, respectively, as of December 31, 2013. This shows Wynn Resorts’ strength in meeting its short-term obligations has improved. The increase was mainly attributable to a decrease in accounts payable and gaming taxes payable and an increase in cash and cash equivalents during the nine months ended September 30, 2014. This reduced current liabilities and increased current assets thereby increased the company’s liquidity ratios.
Relative strength of Wynn Resorts’ liquidity
The above chart shows that Wynn Resorts’ relative liquidity strength in terms of quick ratio of 2.3 is highest among its peer group, which consists of casino companies like Las Vegas Sands (LVS), Melco Crown Entertainment (MPEL), MGM Resorts (MGM), and Caesars Entertainment (or CZR). Melco Crown Entertainment’s current ratio of 3.0 is highest among the peer group. MGM Resorts’ current ratio and quick ratio of 0.6 and 0.5 are the lowest among the peer group.
Investors could have a diversified exposure in these companies through Exchange-traded funds (or ETFs) like Consumer Discretionary Select Sector Standard and Poors depositary receipt (or SPDR) (XLY).