The boom in commodities in the first half of the year sent demand for potash soaring.

This pushed up the price of Canada’s Potash Corp (NYSE:POT). It hit a peak of $240 in July. Since then, the share price has collapsed by almost two-thirds. It is now trading below $100.

These kinds of corrections are creating great bargain in the stock market today. But Andrew Snyder says Potash Corp’s liquidity problems could see it tumble even further in the short term.

This from Today’s Financial News:

The downturn in the stock market is impacting nearly everybody, but some companies are really taking it on the chin. Many businesses are getting hammered by valuation cuts of 60% or more.

If I had to pick just one company that exemplifies the global economic pinch we are enduring, it would be the Canadian powerhouse, Potash Corp. of Saskatchewan (NYSE:POT). The firm, which produces various fertilizers and feed products, is a mirror of everything that was great about the global economy and what is now violently sour.

Over the past five years, Potash shareholders saw their positions rise by more than 1,500%. The stock was on an unbelievable run. Thanks to a booming economy, product demand was through the roof.

Ethanol was fairly fresh to the market, prices for corn were hitting all-time highs, and farmers could not get their crops planted and out of their fields fast enough. They needed lots of fertilizer.

Now, the company’s future does not look nearly as bright. The ethanol fad has come to an end and farmers are realizing they have way too much corn on their hands. Demand for Potash’s products has plummeted. And so has its share price.

Shares that were trading for highs of over $240 in June are now going for less than $100. It is a drop of over 50% in just a few months. Some investors see this as just the start of an even larger plunge. Others think this is a great opportunity to get shares at a discount.

I agree with the bears on this one. There are various fundamental reasons for the company to be considerably overvalued, but the glaring error bulls are making is not gauging the company’s current liquidity. In other words, they are looking at today’s balance sheet and not anticipating what it will look like tomorrow.

The check is in the mail

In a market roiled by credit and debt problems, it is absolutely vital to understand a company’s ability to pay its short-term bills. After all, if it cannot make payroll this week, next week is going to be an even larger problem.

A company’s current asset ratio is a good measure of short-term bill-paying ability. It is a measure of the amount of cash available versus the amount of bills to be paid.

To calculate current ratios, simply divide current assets (those available in the next fiscal period) by current liabilities. If the result is above 1, a company can pay its bills without taking on more debt. Below 1, there are problems ahead.

Potash’s current ratio as of last quarter is 0.88.  It has roughly $2.4 billion in bills, but only $2.1 billion to pay it with. In this credit market, a shortfall of $300 million is a figure worth being concerned about.

In a normal credit market, analysts would glance at that figure, discount a few cents off share price and move on. But when $300 million can be extremely hard to come by, it is a huge red flag to potential investors.

Stay away from Potash until this credit crunch loosens. By then, share price could be much cheaper and you will get in at fantastic levels. Invest now, and you could be in for a turbulent ride as the company figures out how to make up its short-term liquidity needs.

In a month or two, Potash will be a great buy. Until then, there are much better investments out there.

Companies make drastic decisions when times are tough. You do not want to be part of the problem if you do not have to be.

Source: Potash Corp. (POT): Liquidity Trouble Ahead?