Along with a company’s long-term solvency, it’s important to look at its liquidity position.
A company’s current ratio, which is calculated as its current assets divided by its current liabilities, tells us about its ability to pay its short-term obligations using its short-term assets. The higher the ratio, the better the company’s position to pay. A lower ratio suggests a possible liquidity crunch.
These ratios are important—especially when an industry is going through a downturn and companies can’t generate sufficient free cash flow.
Improving liquidity ratios
All the offshore drilling companies under comparison have very comfortable liquidity positions. The highest current ratio of 6.03 is for Rowan Companies (RDC), followed by 4.5 for Diamond Offshore (DO). The lowest current ratio among peers is Transocean’s (RIG) at 1.5, followed by 2.45 for Noble Corporation (NE).
None of the offshore drillers under comparison here has a current ratio of less than 1.0. A ratio lower than 1.0 tells us that a company’s current assets are lower than its current liabilities. These companies may need to resort to their revolving credit facilities to fund their current liabilities. A ratio higher than 1.0 suggests that a company has a sound liquidity position.
It’s worth noting here that liquidity ratios don’t consider capex requirements for offshore drilling (IYE) companies. A company may have a high current ratio but still be able to face a liquidity crunch due to high capex for newbuilds.