It lends a great deal of insight into how well a company generates cash. First a little background on ye olde Flow Ratio. These are items that the company has already paid for, and now they're just sitting around and waiting to be converted into cash at a future date. With the Flow Ratio, it's best to see as low a numerator as possible. If the logic behind the numerator makes sense to you, then just reverse your thinking for the denominator.
Current liabilities are essentially a company's interest-free IOUs.
In other words, these monies represent goods and services which the company has already purchased and received but hasn't yet paid for. Thus, we subtract short-term debt from the current liability total. The end result is that, compared to the Flow Ratio's numerator, we like to see the denominator as high as possible. More on that later. Okay, with that explanation behind us, let me continue my tale.