Cash & liquidity
What it measures¶
This area asks whether the company can pay the bills of the next twelve months, and whether its profit arrives as cash. Liquidity is how easily a company can meet payments that fall due soon. Two balance-sheet totals carry it: current assets — cash and what turns into cash within a year, such as money customers owe and goods in stock — and current liabilities — what the company must pay within a year. The area runs five checks:
| Check | The question | Basis |
|---|---|---|
| Liquidity improving | Did current assets ÷ current liabilities rise against last year? | own history |
| Current ratio floor | Do current assets at least equal current liabilities? | absolute |
| Free cash flow | Is cash from operations, after spending on equipment, positive and at least a tenth of the debt? | absolute |
| Sources and uses | Does the cash available over twelve months cover the cash needed at least 1.2 times? | absolute |
| Cash conversion | Over three years, did operating cash flow at least equal net income? | absolute |
Why it is on the page¶
A company can be profitable on paper and still run out of cash: profit counts a sale when it is made, cash counts it when the customer pays. Rating agencies judge liquidity separately from debt, and on fixed lines rather than against the industry — a bill due next month is due whatever the sector. Running short of cash is how otherwise sound companies are forced into costly borrowing or a sale of assets.
Thresholds, their source and the population they were fitted on¶
Free cash flow is the cash from running the business (operating cash flow) minus the money spent on equipment and buildings (capital expenditure). Sources and uses compares the cash a company can count on over the next twelve months — cash in hand, operating cash flow, unused credit lines — with the cash it must pay out: debt falling due, capital spending, dividends.
| Check | Line | Source and fitted population | Evidence grade |
|---|---|---|---|
| Liquidity improving | the current ratio rose | Piotroski (2000): US companies priced low against the equity on their balance sheet, 1976–1996 | peer-reviewed and replicated |
| Current ratio floor | 1.0 or more; Graham's 2.0 drawn as a reference line for industrial companies | Benjamin Graham, The Intelligent Investor, chapter 14 | folklore |
| Free cash flow | positive, and free operating cash flow ÷ debt 10% or more | S&P's supplemental ratio table (its aggressive floor is about 5%) | practitioner convention |
| Sources and uses | 1.2 times or more is "adequate"; 1.5 strong; 2.0 exceptional | S&P's liquidity descriptors, judged on an absolute scale | practitioner convention |
| Cash conversion | operating cash flow ÷ net income 1.0 or more over three years | Piotroski's accrual sign; the first of James Montier's six warning flags | peer-reviewed and replicated |
The cap. Sources covering uses less than 1.0 times keeps the band's overall word at Mixed at most (see the cap).
A worked example¶
Honeywell International, fiscal year 2025, on the statements stored on 25 October 2026:
- Liquidity improving — failed. The current ratio fell by 0.015 against fiscal 2024.
- Current ratio floor — passed. Current assets were 1.30 times current liabilities.
- Free cash flow — passed. Free cash flow was positive and free operating cash flow came to 18.9% of debt.
- Sources and uses — passed. Sources covered uses 1.96 times.
- Cash conversion — passed. Over three years, operating cash flow was 1.11 times net income.
All five checks could run and four passed: 4 of 5 checks passed · 80% · Strong ✓✓. The five-year history reads Strong in every year from fiscal 2021 to 2025.
What “No verdict” means here¶
The tile shows No verdict when fewer than three checks could run — typically when no cash-flow statement is stored, since three of the five checks read it. A missing cash-flow statement also withholds the band's overall figure: cash is one of the four core areas, and operating cash flow feeds about a third of all checks.
Cash conversion is not applicable to a company whose net income was not positive over three years: dividing cash by a loss says nothing useful. That leaves the denominator, and is not counted as a failure.
What the verdict is and is not¶
The verdict counts how many of these liquidity lines the latest statements met. Strong says the company met most of them at its last year-end; it is not a forecast that it will keep doing so, and a single large payment after the year-end can change the picture. It is not an instruction to trade the shares.