Liquidity and Capital Resources
The term Liquidity and Capital Resources refers to a section of the Management’s Discussion and Analysis of Financial Condition that provides insights into the company’s need for cash as well as its sources of cash. A discussion of a company’s liquidity and capital resources can be found in its Form 10-K filing.
Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations is a required disclosure made by companies that fall under the jurisdiction of the Securities and Exchange Commission (SEC). Liquidity and Capital Resources is a subsection appearing in the MD&A that outlines the company’s sources of, and need for, cash. The discussion appearing in this section should allow the investor-analyst to understand if the company has the ability to generate enough cash to meet its future needs.
The purpose of this section is to enhance the discussion and analysis of information appearing elsewhere in the company’s Form 10-K in a way that:
- Enhances and explains information reported in the company’s cash flow statements.
- Discloses information not readily apparent when companies use the indirect method to prepare their cash flow statements.
- Augments disclosures regarding debt, financial guarantees, as well as related covenants.
Companies are required to disclose in their MD&A the following material information:
- A historical account of their sources of cash and capital expenditures.
- An assessment of the accuracy of cash flow projections appearing in the report.
- Anticipated changes in the company’s mix of capital resources.
- Balance sheet items indicative of the company’s financial strength.
In addition to a discussion of the company’s sources and uses of cash, the Liquidity and Capital Resources section of the MD&A should also include:
- Financing: use of external debt, off-balance sheet financing arrangements, derivatives linked to its common stock, use of stock as liquidity as well as the impact of likely changes to its credit rating.
- Covenants: actions the company takes to avoid breach of guarantees and related covenants, an assessment of the impact a breach will have on the company’s financial condition, in addition to sources of funds to pay these obligations.