The limitations of the traditioanl analysis of the liquid assets

Abstract

The traditional financia! analysis of the liquidity based on the rational study - the current ratio, the acid test ratio and the working capital - turns out insufficient to express a judicious opinion on the liquidity of a company, in as much it is a static analysis and it assumes that the current liabilities will be paid with the resources generated by the conversion into cash of the current assets. Nevertheless, the current assets hove different degrees of liquidity determined on the promptness they hove converted into cash, the time a~d cost of its realization, and the management that is necessary to develop befo re its conversion into cash. In view of this situation the cash flow arises as a suitable and complementary instrument to study in the planning horizon the real capacity of the company to face the payment of short-term liabilities.