Abstract
An item in the Motley Fool recently caught our attention. The article Cisco vs. Lucent: The Flow Ratio Tells All (by Matt Richey, June 6, 2000, in The Motley Fool.fool.com), introduced a new ratio that Richey claimed to be useful for measuring the investment worthiness of a company. Since our Financial Statement Analysis course covers traditional ratio analysis and since we were exploring some research ideas on measuring liquidity, the Fool Ratio seemed worthy of investigation.
Highlights
We conducted a least squares regression test for Lucent and Cisco for the ten periods used by Richey, and we found a significant relationship between stock price and the Flow Ratio
We found that the average Flow Ratio for the retail companies was 1.687, and five of the companies had a flow ratio above the proposed cutoff of 1.25
We have found that the Flow Ratio does not correlate with stock price in any of the industry groups studied
Summary
A n item in the Motley Fool recently caught our attention. The article “Cisco vs. Lucent: The Flow Ratio Tells All” (by Matt Richey, June 6, 2000, in The Motley Fool.fool.com), introduced a new ratio that Richey claimed to be useful for measuring the investment worthiness of a company. The article “Cisco vs Lucent: The Flow Ratio Tells All” (by Matt Richey, June 6, 2000, in The Motley Fool.fool.com), introduced a new ratio that Richey claimed to be useful for measuring the investment worthiness of a company. Since our Financial Statement Analysis course covers traditional ratio analysis and since we were exploring some research ideas on measuring liquidity, the Fool Ratio seemed worthy of investigation. In his article on the Flow Ratio, Richey stated: But, if I had to assess a company’s quality and prospects by looking at the trend of only a single financial metric, I’d choose a balance sheet metric called the Flow Ratio. This paper reports the results of our study. We start with the definition of the Flow Ratio and the benchmark value suggested by Richey. We describe our study and analyze the results. The final section consists of concluding comments and suggestions for further relevant studies
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