Liquidity Analysis Using Cash Flow Ratios as Compared to Traditional Ratios in the Pharmaceutical Sector in Jordan

Abstract

The purpose of this study is to examine the liquidity position of the Jordanian pharmaceutical sector using the traditional ratios as compared to the more recently developed cash flow ratios.The research involved the comparison between traditional ratios and cash flow ratios of the big seven companies of the pharmaceutical industry in Jordan over six years period (2007–2012). The companies were all from the same sector, and the data was obtained from the annual reports of these companies.The findings of the study revealed the following:- There are differences between the traditional ratios which relied heavily on the values derived from balance sheet, and cash flow ratios which relied heavily on values derived from statement of cash flows.- A conclusion on the liquidity of the company based only on traditional ratios could lead to incorrect decisions.- Analysis based on traditional ratios should be compared with cash flow ratios before reaching any conclusion regarding financial liquidity position.- The study showed that there were examples of companies that had good traditional ratios. While their cash flow ratios were weak. In contrast, there were also companies that had poor traditional ratios, but the cash flow ratios showed a better liquidity position. The cash flow ratios provide more information than traditional ratios in measuring the liquidity position of the company. As a result of testing the study hypotheses, and applying SPSS, the significant differences between the cash flow ratios and traditional ratios are determined to measure the liquidity of the Jordanian pharmaceutical Companies.