Liquidity ratios determine a company’s ability to meet its short-term obligations. The liquidity position of a company is measured mainly by using current ratio and quick ratio. Current ratio is also known as short-term solvency ratio or working capital ratio. Quick ratio is also known as liquid ratio or acid test ratio.
Current ratio is calculated by dividing current assets by current liabilities. The quick ratio is more conservative than the current ratio because it excludes inventories from current assets since inventory usually takes time to convert to cash.
The above chart shows that Six Flags Entertainment Corp.’s (SIX) current ratio and quick ratio declined heavily to 1.9 and 1.1, respectively, as of September 30, 2014, after peaking in 2012.
This fall in liquidity ratios is mainly attributable to ~$460 million fall in cash and cash equivalents, primarily on account of share repurchases and dividend payments.
Even though Six Flags Entertainment’s (SIX) current ratio declined heavily, its current ratio at 1.9 is still the highest among the peer group, which consists of companies such as Cedar Fair (FUN) and SeaWorld Entertainment (SEAS). Cedar Fun’s quick ratio of 1.2 is highest among the peer group, as we saw above. SeaWorld Entertainment’s current ratio and quick ratio are the lowest among the peer group.