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In this article, we will take a deep dive into the liquidity analysis of four competitors in the agricultural chemicals space: CF Industries Holdings (CF), Potash Corporation of Saskatchewan (POT), Agrium (AGU), and The Mosaic Company (MOS).

In investing, it helps to be methodical and focused. One of the most common mistakes investors make is trying to take in everything at once, only to end up with nothing at all. In my experience, focusing on one area often generates invaluable insights that ultimately drive successful investing.

For the beginner to intermediate investor, my focused approach will be immensely helpful in condensing daunting financial statements into actionable insights.

Liquidity Analysis - What Is It & Why Does It Matters?

Liquidity analysis is the foundation of balance sheet analysis. There are many ways to go about liquidity analysis, with liquidity ratios analysis being the most popular.

Liquidity ratios are a set of ratios that measure a company's ability to pay off its short-term debt obligations. This is done by measuring a company's liquid assets (including those that might easily be converted into cash) against its short-term liabilities.

In general, the greater the coverage of liquid assets to short-term liabilities, the more likely it is that a business will be able to pay debts as they become due while still funding ongoing operations. On the other hand, a company with a low liquidity ratio might have difficulty meeting obligations while funding vital ongoing business operations.

Liquidity issues place equity holders in a very difficult position since it constrains a company's ability to expand, and may lead to disruption of operations, equity dilution, and/or default.

There are a number of different liquidity ratios, which each offering a different angle of insight. Here, we will focus on two important and commonly used liquidity ratios, and see how these companies stack up against each other.

We use the latest 3 years of quarterly data. All data are from the Company's SEC filings.

Current Ratio

The current ratio is the most basic liquidity test. It signifies a company's ability to meet its short-term liabilities with its short-term assets.

Current Ratio = (Current Assets) / Current Liabilities

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Comment: The Current Ratio fluctuates quite a bit, going to as low as 1.3. The standard deviation of the current ratio is 0.7 with a mean of 2.2. A two standard deviation event would reduce the current ratio to under 0.71, which does not inspire confidence.

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Comment: The Current Ratio fluctuates quite a bit, going to as low as 0.7. The standard deviation of the current ratio is 0.3 with a mean of 1.1. A two standard deviation event would reduce the current ratio to under 0.49 - Ouch!

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Comment: The Quick Ratio is quite strong, with the lowest in 12 quarters being 2.7. The standard deviation of the Quick ratio is 0.4 with a mean of 3.5. A two standard deviation event would reduce the Quick ratio to under 2.75 - not bad!

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Comment: The Quick Ratio fluctuates quite a bit, going to as low as 1.4. The standard deviation of the Quick Ratio is 0.3 with a mean of 1.9. A two standard deviation event would reduce the Quick Ratio to under 1.36 - It's OK.

Quick Ratio

The quick ratio is a tougher test of liquidity than the current ratio. It eliminates certain current assets such as inventory and prepaid expenses that may be more difficult to convert to cash.

Quick Ratio = (Cash + Accounts Receivable + Short-Term or Marketable Securities) / (Current Liabilities)

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Comment: The Quick Ratio fluctuates quite a bit, going to as low as 1. The standard deviation of the Quick Ratio is 0.6 with a mean of 1.8. A two standard deviation event would reduce the Quick Ratio to under 0.5 - That is scary!

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Comment: The Quick Ratio fluctuates quite a bit, going to as low as 0.5. The standard deviation of the Quick Ratio is 0.2 with a mean of 0.8. A two standard deviation event would reduce the Quick Ratio to under 0.34 - I'm feeling the pain already.

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Comment: The Quick Ratio is quite strong, with the lowest in 12 quarters being 1.7. The standard deviation of the Quick Ratio is 0.3 with a mean of 2.4. A two standard deviation event would reduce the Quick Ratio to under 1.85 - Where do I sign up?

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Comment: The Quick Ratio fluctuates quite a bit, going to as low as 0.4. The standard deviation of the Quick Ratio is 0.3 with a mean of 1. A two standard deviation event would reduce the Quick Ratio to under 0.4 - Get me outta here!

Conclusion

Of course, it'd be silly to invest solely based on liquidity analysis. However, this deep dive into four competitors' liquidity over a 3-year time period surely generated some actionable insights. Here is a tip, check out AGU, and be wary of POT!

Source: Liquidity Analysis Of Agricultural Chemical Companies