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.
Other measurements of financial liquidity ratios include the quick ratio, inventory days, payable days, and receivable days. But the current ratio is considered the most comprehensive measure for analyzing the liquidity profile of a company.
New Gold (NGD) and Eldorado Gold (EGO) appear to be the best-placed mining companies in terms of short-term liquidity, whereas Sibanye Gold’s current ratio is the poorest placed, as it’s very low. Gold Fields (GFI) and AngloGold Ashanti (AU) have current ratios of 1.3x and 1.6x, respectively.
The SPDR Gold Shares (GLD) and the VanEck Vectors Gold Miners ETF (GDX) are two notable ETFs in the gold industry. Investors can consider these ETFs to get exposure to gold. AngloGold forms 4.5% of the GDX’s portfolio holdings.