Cash Flow Ratios’ and Liquidity Ratios’ Analysis of Selected Listed Companies in Sri Lanka

Abstract

As it is known, the statement of cash flows is a crucial part of financial reporting. And cash flow ratios have provoked the attention of practitioners and academic researchers to use to evaluate the performance of a company. This study examines, over the 3-year period (2012–2014), the liquidity position of selected 125 companies of the Sri Lankan economy using cash flow statement ratios and classic liquidity ratios suggested by various researchers. The total number of companies listed in the main market of the Colombo Stock Exchange is 313. Classic ratios were obtained from the Osiris database, and cash flow ratios were calculated by using financial statements of selected companies. The ratios, which I examined, are those current ratio, quick assets ratio, total assets to total liabilities ratio, and interest coverage ratio. Similarly, cash flow ratios examined were operating cash flow ratio, critical needs cash coverage ratio, cash flow to total debt ratio, and cash interest coverage ratio. And for investigation to find out how strong is relationship between classic and cash flow ratios correlation analysis were made. Results, which were got after correlation analysis showed positive relationship between classic and cash flow ratios. However additional t-tests analysis, showed substantial difference. The main point of the abovementioned results suggests that well-known liquidity ratios should not be used only for calculating liquidity since a company can have serious cash flow problems with positive liquidity ratios and increasing profits. Liquidity ratios developed using the statement of cash flows provide additional information or sometimes better insight on the financial strength or weakness of a company.