What is a Current Ratio?
The current ratio is the ratio of current assets to current liabilities. It is used to measure the ability of a company's current assets to become cash for debt repayment before short-term debts mature. Generally speaking, the higher the ratio, the stronger the ability to realise the assets of the enterprise and the stronger the short-term debt repayment ability; otherwise, the weaker it is. It is generally believed that the current ratio should be more than 2: 1 and the current ratio of 2: 1, which means that the current assets are twice the current liabilities. Even if half of the current assets cannot be realised in the short term, all current liabilities can be guaranteed to be repaid.
Basic Information
- Chinese name
- Current ratio
- Foreign name
- current ratio, CR
- Pinyin
- liú dòng b l
- Algorithm
- Current ratio
- 1. Unable to assess future capital flows.
- Liquidity represents a company's ability to use sufficient cash inflows to balance the required cash outflows. And all elements of the current ratio come from
Current ratio inspection receivable
- Triangular debt among enterprises is common, and the arrears period is a bit long, especially for large and medium-sized state-owned enterprises. Even if the company has withdrawn bad debt reserves, sometimes it is not enough to offset the actual amount of bad debts. Obviously, this part of accounts receivable is no longer a current asset in the usual sense. Therefore, users of accounting statements should consider the amount of accounts receivable, the proportion of actual bad debt losses in the company's accounts receivable in previous years, and the age of accounts receivable. Estimate the quality of corporate receivables.
Current pricing
- That is, the book value of each item of current assets is compared with the replacement cost, current cost, and recoverable value. A major component of a company's current assets is inventory, which is recorded at historical cost. In fact, it is very likely that the inventory will be sold at a price much higher than this cost, so the amount of cash obtained through the sale of inventory is often larger than the amount used in calculating the current ratio. At the same time, as time goes by and inflation continues, the historical cost of the inventory and the replacement cost will inevitably deviate, but only the historical cost of inventory is used in the calculation formula of the current ratio. In order to more accurately reflect the current value of inventory, users of accounting statements should compare the historical cost of using inventory with the current ratio calculated using replacement cost or current cost. If the current ratio at replacement cost or current cost is greater than the original current ratio, it is a favorable difference, indicating that the company's ability to pay debts has been enhanced; otherwise, it indicates that the company's ability to pay debts has weakened.
Current ratio analysis factors
- Users of accounting statements need not only a true and fair description of the company's current capital status, but also want to know the predictive information that is conducive to decision-making and reflects the company's future capital flow and financing. However, the current ratio itself has certain limitations, such as failing to reflect the company's capital flow and financing status on the debt maturity date. Users of accounting statements can make a more accurate assessment of the company's solvency if they use the adjusted current ratio and conduct comprehensive analysis in conjunction with relevant off-balance sheet factors. For example, if there is a large amount of contingent liabilities, dividends and guarantees in the notes to the corporate accounting statements, it may lead to a reduction in the company's future cash and reduce the company's ability to pay debts. And if the company owns long-term assets that can be realized quickly, or can use financing measures such as available bank loan indicators and additional stock issues, it can increase the company's current assets and improve its ability to repay debt. Interrelation of current ratio, quick ratio and cash ratio:
- 1. All current assets are used as the basis for repayment of current liabilities, and the calculated index is the current ratio;
- 2. The quick ratio is based on deducting inventory with poor realizing capacity and unrealizable unpaid expenses as the basis for repaying current liabilities, which makes up for the shortfall in current ratios;
- 3. The cash ratio uses cash assets as the basis for repaying current liabilities, but excessive cash holdings have a side effect on the use of corporate assets. This indicator is only used when the company is facing a financial crisis. Compared with the current ratio and quick ratio For its part, its effect is small.
- The quick ratio is the same as the current ratio, which reflects the liquidity of the unit assets and the ability and level of rapid repayment of due liabilities. In general, the current ratio is 2 and the quick ratio is 1. However, in practical analysis, the ratio is often in different industries, and the difference is very large.
- Quick ratio, relative to the current ratio, after deducting some very illiquid assets, such as unpaid expenses, such assets are actually impossible to repay debts; in addition, consider the damage to inventory, ownership, present value, etc. Factors, the realizable value may be very different from the book value, so the inventory is also deducted from the current ratio. As a result, the quick action ratio is a very harsh reflection of a unit's ability and level to pay its debts immediately.
Practical examples of current ratios
- The security of listed company assets should include two aspects: first, relatively stable cash flow and current assets ratio; second, strong short-term liquidity, which will not affect the stability of earnings. Therefore, when analyzing the security of listed company's assets, it should start from the following two aspects: First, the greater the liquidity of the listed company's assets, the greater the security of the listed company's assets. If a listed company has 5 million yuan of assets, the first case is that the assets are all equipment; the other case is that 70% of the assets are physical assets, and the other are various types of financial assets. Suppose that one day the company's funds will have difficulty in turnover, and when a part of the company's assets urgently needs to fulfill the debt repayment, which case can be realized quickly? The latter is a matter of course. Because current assets are more liquid than fixed assets, and more importantly, marketable securities are easy to sell on the securities market, and various bills are also easy to discount on the discount market. Many companies go bankrupt. The problem is often not that the company's assets are too small, but that the funds cannot be turned over and the debt cannot be paid off in a timely manner. Therefore, the liquidity of assets brings about the security of assets.
- There must be a minimum ratio between the amount of liquid assets and the amount of debt to be repaid in the short term. If this ratio is not reached, either increase the amount of current assets or reduce the amount of debt to be repaid in the short term. This ratio is called the current ratio. Current ratio refers to the ratio of current assets to current liabilities. It measures the ability of a company's current assets to be used to repay current liabilities before the maturity of its short-term debt. It indicates how much current assets of each yuan of current liabilities of a company are used as a guarantee of payment. . The current ratio is a more commonly used ratio to evaluate a company's ability to service its debt. It can measure the short-term debt repayment ability of an enterprise. It requires that after the company's current assets have been paid off, it must have the power to meet other funding needs in its daily operations. According to general experience, the current ratio should be above 200%, so as to ensure that the company has both a strong solvency and a smooth production and operation of the company. When using the current ratio to evaluate the financial status of listed companies, it should be noted that the operating nature of each industry is different, the business cycle is different, and the requirements for asset liquidity are different. Therefore, the 200% current ratio standard is not absolute.
- Second, there are two types of assets in liquid assets, one is inventory, such as physical assets such as raw materials and semi-finished products; the other is quick-moving assets. Financial assets such as securities mentioned above. Obviously, quick assets are easier to cash out than inventories. The larger the proportion, the greater the liquidity of assets. Therefore, comparing quick assets with short-term debt to be repaid is the quick ratio. Quick ratio represents the comprehensive ability of an enterprise to repay current liabilities with quick assets. Quick ratio is usually expressed as (current assets-inventory) / current liabilities. Quick assets refer to the portion of current assets that can be directly used to repay current liabilities after deducting from the current assets the slowest realizing inventory and other assets. However, some people think that it should be expressed as (current assets-pending expenses-inventory-prepaid accounts) / current liabilities. This view is more robust. Because of the current assets, the inventory realizing ability is relatively poor; the expenses to be apportioned are the expenses that have already occurred, and the expenses that should be shared by the current and future periods with an apportion period within one year have no realizing ability at all; The meaning is the same as inventory, so these three items are not included in quick assets. It can be seen that the quick ratio is more representative of the short-term solvency of an enterprise than the current ratio. In general, it is more reasonable to determine the two as 1: 1. Because a debt is backed by a quick-action asset, no problems occur. Moreover, the appropriate quick ratio can guarantee that the company will not affect the production and operation while repaying the debt.
- Business financial analysis indicators
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