Lack of liquidity can among other things:
The first question to ask when assessing the liquidity risk is if the firm has a sound financing structure. With that we mean if there is a good balance between equity and long-term and short-term financing, corresponding to the nature of the assets and the risk of operations.
When the financing structure is in place the next question is if the firm on an ongoing basis has sufficient cash flows to pay interest and instalments. A related issue to the ability to meet future obligations is whether a firm has liquidity reserves for rainy days; i.e. events that have significant impact on the cash outflows. Finally, is the firm liquidity efficient; i.e. is the firm utilising its spending on working capital and other related assets in an efficient manner?
Financial ratios measuring liquidity risk are
Perform a comprehensive analysis that uncovers all important aspects of a firm’s financial position. In addition to the financial analysis outlined in this chapter, it should include a strategic analysis which encompasses an assessment of the industry attractiveness and the competitive edge of the firm being analysed relative to its peers. Ideally, the financial analysis and the strategic analysis should be merged into a quantitative assessment of the future cash flow potential of the firm.