Liquidity Measurement Problems in Mining Companies

Abstract

The ability to manage liquidity is important in any economic conditions. It assumes unique importance during a downturn and depends on management having reliable information on the company’s liquidity level. Static liquidity ratios do not provide such reliable information. Their high values result from high inventory levels of extracted raw materials and is not tantamount to excess liquidity. Additional information is offered by the cash cycle and its constituents – Days Inventory Outstanding, Accounts Receivable Days and Accounts Payable Days. Long cash cycles signal a shorter deferral of settlement of suppliers’ bills and a lower liquidity level. To maintain liquidity, companies must maintain higher cash balances in their accounts. Short cycles, on the other hand, may result from late payment of invoices, which is reflected in long Accounts Payable Days. Some coal companies have very long Accounts Payable Days and negative cash conversion cycles. This means that some of their non-current assets are financed out of current liabilities.