Although financial leverage is important in gauging a company’s long-term solvency, short-term liquidity profiles are also important. In a weaker commodity price environment, short-term liquidity could 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 chart above shows gold miners’ current ratios, which show a company’s ability to pay its short-term obligations using 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, Kinross Gold also has a comfortable liquidity position with a current ratio of 3.9x. Barrick Gold’s (ABX) liquidity is comfortable with a ratio of 2.7x.
Combined, Newmont Mining and Barrick Gold form 13% of the VanEck Vectors Gold Miners ETF (GDX). Investors can access the gold industry by investing in gold-backed ETFs like the SPDR Gold Trust ETF (GLD).