Does the company have too many liabilities?  Liquidity determines if there is enough cash and other current assets to pay the bills.  Current assets are those that can be readily converted to cash.  Current ratio of 1-2 is ideal indicating an ability to pay debts that are coming due with "on hand" assets.

 

Perhaps a more accurate test would be the Quick Ratio ( also known as the Acid Test ) which eliminates inventory ( which may be hard to convert quickly to cash ) and determines if debts can be paid with cash or marketable securities.  This test implies that even if no more widgets were sold that the short-term debts can still be paid.  Large inventories or rising inventory levels are both warnings that must be investigated as it implies inefficiency and reduced sales.

The cash ratio is even more specific as it looks at whether debts can be paid with cash on hand or equivalents.  High cash levels are generally considered good although excessive cash and security levels can become targets for takeover.

 

Operating cash flow ratio compares cash flow from operations to liabilities that must be paid, essentially if money coming in can pay the bills.  Negative or low operating cash flow ratios are warnings that must be investigated.