Alternative measures of aggregate company liquidity

Quarterly Bulletin 1988 Q2
Published on 01 June 1988

The past seven years have seen a remarkable turn-round in the financial performance of industrial and commercial companies (ICCs). Gross trading profits (net of stock appreciation) rose at an annual rate of some 14½% between 1980 and 1987, and, excluding the contribution from North Sea activity (which is influenced by movements in oil prices), the recovery was even stronger (18%), with the pre-tax real rate of return rising from under 4% in 1980 to more than 10% by the end of 1987, its highest level since the early 1970s.

ICCs in aggregate have recorded eight consecutive years of financial surplus, giving rise to a net cumulative increase of some £45 billion in their holdings of financial assets. Nevertheless, a key feature of their behaviour over this period has been the significant increase in bank borrowing (some £56 billion) and net capital issues (around £26 billion). Of this £130 billion total, some £30 billion is accounted for by a net increase in investment abroad, but by far the most notable feature has been the rapid accumulation of liquid assets, amounting to over £46 billion.

The shift towards 'liquidity' appears particularly marked when asset accumulation is considered gross. However, the growth of short-term borrowing has also been rapid so that the net liquidity position is broadly unchanged. This note reviews the main alternative measures of aggregate liquidity. It concludes that no single measure can adequately represent the sectoral liquidity position; rather, a variety of indicators are required in order to monitor all aspects of the liquidity concept.

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