While financial leverage is important to gauge a company’s long-term solvency, short-term liquidity profiles are also important. In a weaker commodity price environment, short-term liquidity might come under more pressure. A company could be forced to take drastic measures.
The current ratio is one way to estimate a company’s liquidity. The above graph shows gold miners’ current ratio. It shows a company’s ability to pay its short-term obligations using its short-term assets.
The higher the ratio, the better the company can service its short-term liabilities and vice versa. Kinross Gold (KGC) and Newmont Mining (NEM) are doing the best in this parameter while Yamana Gold (AUY) is doing the worst. Along with a good solvency position, Agnico Eagle Mines (AEM) also has a very comfortable liquidity position with current ratios of 2.9x. Unlike leverage, Barrick Gold’s (ABX) liquidity is comfortable with a ratio of 2.5x.