Faculty & Research
Short-Term Liquidity Measures for Restaurant Firms: Static Measures Don't Tell the Full Story
Vol 7 No 11
By: Linda Canina Ph.D. and Steven A. Carvell Ph.D.
Executive Summary: Although most analysts apply static measures such as the current ratio or the quick ratio to assess a firm's short-term liquidity, a separate calculation of dynamic integrative measures can tell a completely different story about a firm's ability to meet its short-term obligations. One important difference between the two types of measures is that the static measures assume that a firm will be liquidated, while the integrative measures evaluate the liquidity of the firm as a going concern. Analyzing a sample of restaurant and manufacturing firms from 1994 through 2003, the static measures of liquidity imply that restaurant companies are illiquid, while manufacturing companies are liquid. However, when the same companies are evaluated under an integrative framework, restaurant firms were shown to be the more liquid ones, based on their financial and operating liquidity. Compared to restaurants, manufacturing firms exhibit a certain amount of operating illiquidity due to the length of their cash-conversion cycle (that is, the time it takes to generate revenue from the expense of adding and processing inventory). The analysis suggests that financial analysts, creditors, and managers should evaluate both dynamic liquidity measures and static measures in assessing short-term liquidity, since each measure provides different information about a company's ability to cover its obligations. Moreover, when evaluating a company's liquidity over time, one must pay careful attention to the sources of any changes in a company's liquidity position. The finding that restaurants, particularly owner-operator firms, have high operating liquidity should be an argument for favorable short-term financing terms, even though static ratios make restaurants seem like poor risks. An accurate evaluation of short-term liquidity may improve restaurants' cost of short-term financing, overall financing costs, and required returns from equity investors.
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- Short-Term Liquidity Measures for Restaurant Firms: Static Measures Don't Tell the Full Story By: Linda Canina Ph.D. and Steven A. Carvell Ph.D.
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About Linda Canina Ph.D.
Linda Canina is an associate professor in the School of Hotel Administration's Finance, Accounting, and Real Estate department. There, she teaches undergraduate and graduate courses in corporate finance. Canina also serves as editor of the Cornell Hospitality Quarterly. Her research interests include asset valuation, corporate finance and strategic management. She has expertise in the areas of econometrics, valuation, IPO's, payout policy, mergers and acquisitions, options and the hospitality industry. Canina's current research focuses on strategic decisions and performance, the relationship between purchased resources, human capital and their contributions to performance, the relationship between various liquidity measures and profitability, and measuring the adverse selection component of the bid/ask spread. Her recent publications include: "Agglomeration Effects and Strategic Orientations: Evidence from the U.S. Lodging Industry" in the Academy of Management Journal. Canina's other work has appeared in the Journal of Finance, Review of Financial Studies, Financial Management Journal, the Journal of Hospitality and Tourism Research, and the Cornell Hotel and Restaurant Administration Quarterly. She holds a Ph.D. degree from New York University.
For more information visit http://www.hotelschool.cornell.edu/research/facultybios/faculty.html?id=10
About Steven A. Carvell Ph.D.
Steven Carvell is a professor and associate dean for Academic Affairs at the School of Hotel Administration. He has taught finance courses at the school since 1986. Carvell’s research is directed toward new approaches to hotel valuation and investment decisions. Recent projects have focused on adjusted present value analysis and the valuation of sequential real options within a hotel valuation framework; the valuation of exotic reservation options in hotels; and determining optimal brand standards for hotel companies. Carvell recently finished a major project designed to identify the determinants of hotel demand in the U.S. He is also involved with evaluating the effectiveness of hotel company business strategies, using strategic benchmarking and Economic Value Added analysis. Carvell is the co-author of "In the Shadows of Wall Street," (Prentice-Hall, Inc. Strebel, Paul and Steven Carvell, 1988). publisher, year). He has published ten articles in academic and professional journals including the Financial Analysts Journal and the Harvard Business Review. His work has been featured in the Wall Street Journal, The New York Times, Forbes, Fortune, Institutional Investor and Financial World. Carvell has worked for professional money managers in applied strategy in the equity market and served as a consultant to the Presidential Commission on the 1987 stock market crash. He specializes in new approaches to valuation and risk analysis in feasibility studies, hotel debt capacity models, strategic benchmarking and Economic Value Added Analysis. Professor Carvell has conducted numerous specialized Executive Education seminars for some of the largest hotel companies in the world. Carvell holds a Ph.D. from the State University of New York, Binghamton.
For more information visit http://www.hotelschool.cornell.edu/research/facultybios/faculty.html?id=11
