Let’s take a look at Melco Crown Entertainment’s (MPEL) liquidity ratios, which determine the company’s ability to meet its short-term obligations. The liquidity position of a company can be measured by using two main liquidity ratios:
- Current Ratio: The current ratio is also known as the short-term solvency ratio or working capital ratio. It is calculated by dividing current assets by current liabilities.
- Quick Ratio: Quick ratio is also known as liquid ratio or acid test ratio. The quick ratio is more conservative than the current ratio because it excludes inventories from current assets, since inventory usually takes time to convert into cash.
The above chart shows that Melco Crown Entertainment’s current ratio increased to 3.0 from 2.5. This improvement reflects its much stronger ability to meet its short-term obligations. However, its quick ratio declined slightly to 1.7 as of September 30, 2014, from 1.8 as of December 31, 2013.
The increase in Melco Crown Entertainment’s current assets was mainly attributable to a significant increase in cash and cash equivalents, including the current portion of restricted cash during the nine months ending September 30, 2014. The current portion of restricted cash is reserved for specific purposes, excluding withdrawal and use.
MPEL expects that the restricted cash will be released or utilized within the next 12 months. This restricted cash is not included in the calculation of quick ratio, making the quick ratio much lower when compared to the current ratio.
The above chart shows that MPEL’s current ratio of 3.0 is highest among its peer group, which consists of casino companies like Las Vegas Sands (LVS), Wynn Resorts (WYNN), and MGM Resorts (MGM). WYNN’s quick ratio of 2.3 is highest among the peer group. MGM’s current ratio of 0.6 and quick ratio of 0.5 are the lowest among the peer group.
Investors can gain a diversified exposure in these companies through ETFs such as the Consumer Discretionary Select Sector SPDR Fund (XLY).