Comparative Financial Analysis: Liquidity & Cash Flow for Investment

This report presents a comprehensive analysis of liquidity and cash flow ratios for two firms, AIV and BRL, over a five-year period. The analysis includes the calculation and comparison of key financial ratios such as the current ratio, quick ratio, cash ratio, operating cash flow ratio, cash flow margin ratio, and cash flow to liabilities. The report highlights the superior liquidity position of AIV compared to BRL, although BRL shows improving liquidity trends while AIV's liquidity ratios have decreased. The cash flow analysis reveals that BRL demonstrates more positive cash flow metrics than AIV. Based on the analysis, the report recommends investing in BRL due to its improving financial performance in both liquidity and cash flow, making it a more favorable investment choice compared to AIV, which is still developing and has limited commercial production.

INVESTMENT ANALYSIS
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LIQUIDITY ANALYSIS
Liquidity is the ability to convert assets into cash at short notice. Liquidity is commonly
measured using the current ratio, quick ratio, and cash ratio. Current ratio is calculated as
Current assets divided by current liabilities. This ratio measures the ability of the firm to pay
off its current liabilities by liquidating its current assets. It indicates the firm's ability to avoid
insolvency in the short run (Damodaran 2015, 98). Quick ratio is also called the acid test
ratio. It has the same denominator as the current ratio, but its numerator includes only cash,
cash equivalents, and receivables. The quick ratio is a better measure of liquidity than the
current ratio for firms whose inventory is not readily convertible into cash. A company's
receivables are less liquid than its holdings of cash and marketable securities. Therefore, in
addition to the quick ratio, analysts also compute a firm's cash ratio, defined as above (Lasher
2017, 143-144).
FIRM AIV
Current ratio
Current assets/current liabilities
YEAR 2014- 1,277,212.00/191,058.00= 6.68
YEAR 2015- 3,454,337.00/197,946.00=17.45
YEAR 2016- 1,149,822.00/149,555.00=7.69
YEAR 2017- 1,567,055.00/249,074.00=6.29
YEAR 2018- 1,011,503.00/231,554.00=4.37
Quick ratio
(Cash+ marketable securities+ receivables)/current liabilities
YEAR 2014- (1,187,000.00+17,778.00+72,434.00)/191,058.00=6.68
YEAR 2015- (3,353,509.00+30,524.00+69,304.00)/197,946.00=17.45
YEAR 2016- (1,054,846.00+10,305.00+84,671.00)/149,555.00=7.69
YEAR 2017- (1,475,834.00+3,354.00+87,867.00)/249,074.00=6.29
YEAR 2018- (909,609.00+7,303.00+94,590.00)/231,554.00=4.37
Cash ratio
(Cash+ marketable securities)/current liabilities
YEAR 2014- (1,187,000.00+72,434.00)/191,058.00=6.59
YEAR 2015- (3,353,509.00+69,304.00)/197,946.00=17.29

YEAR 2016- (1,054,846.00+84,671.00)/149,555.00=7.62
YEAR 2017- (1,475,834.00+87,867.00)/249,074.00=6.28
YEAR 2018- (909,609.00+94,590.00)/231,554.00=4.34
FIRM BRL
Current ratio
Current assets/current liabilities
YEAR 2014- 13,669,733.00/15,314,561.00=0.89
YEAR 2015- 9,428,014.00/14,590,047.00=0.65
YEAR 2016- 11,206,025.00/8,535,608.00=1.31
YEAR 2017- 37,208,571.00/31,744,761.00=1.17
YEAR 2018- 27,300,742.00/9,215,812.00=2.96
Quick ratio
(Cash+ marketable securities+ receivables)/current liabilities
YEAR 2014- (8,228,789.00+3,963,386.00+72,483.00)/15,314,561.00=0.81
YEAR 2015- (4,635,204.00+3,360,297.00+82,344.00)/14,590,047.00=0.57
YEAR 2016- (5,675,469.00+2,430,164.00+217,370.00)/8,535,608.00=1.10
YEAR 2017- (31,142,857.00+2,430,164.00+34,285)/31,744,761.00=1.11
YEAR 2018- (18,507,750.00+2,579,748.00+0)/9,215,812.00=2.84
Cash ratio
(Cash+ marketable securities)/current liabilities
YEAR 2014- (8,228,789.00+72,483.00)/15,314,561.00=0.54
YEAR 2015- (4,635,204.00+82,344.00)/14,590,047.00=0.32
YEAR 2016- (5,675,469.00+217,370.00)/8,535,608.00=0.68
YEAR 2017- (31,142,857.00+34,285.00)/31,744,761.00=0.98
YEAR 2018- (18,507,750.00)/9,215,812.00=2.01
Comparison between both firms
The comparison of the liquidity ratios for both the firms clearly highlight that AIV is in a
superior position in comparison to BRL. This is attributed to the liquidity ratios being
significantly greater than AIV than BRL even though both companies belong to the same
sector. However, a key difference between both the companies is that during the last five

years, there has been an improvement in the liquidity ratios of BRL which is in stark contrast
with the decreasing trend witnessed for AIV. Continuation of the same trend in the future
could potentially imply better days for BRL instead of AIV (Brealey Myers and Allen 2014,
122-123).
CASH FLOW RATIO ANALYSIS
Cash flow form a critical component of the firm’s performance as it indicates the movement
of cash particular with regards to sources and deployment of cash which helps in determining
the closing balances. One of the key cash flow ratios is operating cash flow ratio which
highlights the ability of the operational cash flow to discharge the current liabilities. Another
relevant ratio is cash flow margin ratio which expresses the cash generated from operations as
a percentage of sales. Another ratio used to measure the solvency of the company is
expressing cash flow from operations as a percentage of total liabilities (Arnold 2015, 87-88).
FIRM AIV
Operating cash flow ratio
Operating cash flow/current liabilities
YEAR 2014=(-1,002,863.00)/191,058.00= -5.25
YEAR 2015=(-884,908.00)/197,946.00= -4.47
YEAR 2016=(-804,164.00)/149,555.00= - 5.38
YEAR 2017=(-669,403.00)/249,074.00= -2.69
YEAR 2018=(-733,670.00)/231,554.00= -3.17
Cash flow margin ratio
Operating cash flow/Sales
YEAR 2014=(-1,002,863.00)/25,800.00= -38.87
YEAR 2015=(-884,908.00)/7,578.00= - 116.77
YEAR 2016=(-804,164.00)/10,026.00= - 80.21
YEAR 2017=(-669,403.00)/21,750.00= - 30.78
YEAR 2018=(-733,670.00)/2,764.00= -265.44
Cash flow to liabilities
Operating cash flow/Total liabilities
YEAR 2014=(-1,002,863.00)/2,737,148.00= -0.37

YEAR 2015=(-884,908.00)/149,555.00=-5.92
YEAR 2016=(-804,164.00)/249,074.00=-3.23
YEAR 2017=(-669,403.00)/231,554.00= -2.89
YEAR 2018=(-733,670.00)/781,552.00=-0.94
FIRM BRL
Operating cash flow ratio
Operating cash flow/current liabilities
YEAR 2014= (-16717)/15,314,561.00=-0.0011
YEAR 2015=976/14,590,047.00=0.0001
YEAR 2016=10241/8,535,608.00=0.0012
YEAR 2017=9163/31,744,761.00=0.0003
YEAR 2018=21208/9,215,812.00=0.0023
Cash flow margin ratio
Operating cash flow/Sales
YEAR 2014= (-16717)/55525= -0.30
YEAR 2015=976/51289=0.02
YEAR 2016=10241/50879=0.20
YEAR 2017=9163/41591=0.22
YEAR 2018=21208/47817=0.44
Cash flow to liabilities
Operating cash flow/Total liabilities
YEAR 2014= (-16717)/27565= -0.61
YEAR 2015=976/31526=0.03
YEAR 2016=10241/24032=0.43
YEAR 2017=9163/71579=0.13
YEAR 2018=21208/49054=0.43
Comparison between both firms
With regards to cash flow ratios, it is apparent that BRL is a preferable choice in comparison
to AIV. The main reason responsible for the same is that the operating cash flows for AIV for

significantly negative with minimal sales as the company has limited commercial production
in the present. It is still developing the asset and would produce future cash flows. The
situation for BRL is quite different as it has significant operating cash flows which comprise
a significant proportion of the total liabilities of the company. Over the years, there has been
a deterioration in cash flows ratios of AIV which is unlike BRL which has shown some
improvement despite lacking a clear trend.
RECOMMENDATION
On the basis of the above analysis, it would be recommended that the investor should invest
in BRL instead of AIV. The main basis of this recommendation is the improvement in
performance both in terms of liquidity and cash flow over the recent five year by BRL. On
the other hand, the performance AIV has deteriorated in the last five year both with regards to
liquidity and cash flow ratios. Also, the current revenues of AIV are almost zero since
commercial production is yet to occur. As a result, there is higher risk associated with AIV
business which in the future may or may not yield desirable returns (Damodaran 2015,145).

References
Arnold, G. 2015 Corporate Financial Management. 3rd ed. Sydney: Financial Times
Management,
Brealey, R. A., Myers, S. C., and Allen, F. 2014, Principles of corporate finance, 2nd ed.
New York: McGraw-Hill
Damodaran, A. 2015, Appl0ied corporate finance: A user’s manual 3rd ed. New York:
Wiley, John & Sons,
Lasher, W. R., 2017, Practical Financial Management. 5th ed. London: South- Western
College Publisher