Factors that affect the current ratio

1. In general, the business cycle, the amount of accounts receivable in current assets and the turnover rate of inventory are the main factors affecting the current ratio.

2. Extended Information - Current Ratio:

1. Current ratio refers to the ratio of total current assets to total current liabilities. The formula is current ratio = total current assets and total current liabilities * 100%. Current assets refer to assets that can be realized or used by an enterprise within a business cycle of one year or more than one year, mainly including monetary funds, short-term investments, notes receivable, accounts receivable and inventory.

Current liabilities, also known as short-term liabilities, refer to debts that will be repaid within one year or more of a business cycle, including short-term borrowings, notes payable, accounts payable, accounts receivable, dividends payable, taxes payable, other temporary accounts payable, withholding expenses and long-term borrowings due within one year.

2. Current ratio formula: current ratio = total current assets and total current liabilities.

3. The current ratio is used to measure the ability of an enterprise's current assets to be turned into cash to repay liabilities before the maturity of short-term debts. Although the higher the current ratio, the greater the liquidity of the company's assets, but the ratio is too large to indicate that the current assets occupy more, which will affect the efficiency and profitability of operating capital turnover. The minimum current ratio that is generally considered reasonable is 2.

4. However, it should be noted that enterprises with high current ratios do not necessarily have a strong ability to repay short-term debts, because although the liquidity of cash, valuable and accounts receivable is very strong, but the inventory, amortized expenses and other items that are also current assets are more likely to be realized, especially the inventory is likely to be overstocked, unsalable, defective, cold back, etc., and the liquidity is poor. The quick ratio can avoid this because liquid assets are those parts of liquid assets that are easily liquidated.

5. It is generally believed that the current ratio should be above 2:1 and the quick ratio should be above 1:1.

The current ratio of 2:1 means that the current assets are twice the current liabilities, and even if half of the current assets cannot be realized in the short term, the entire current liabilities can be repaid; The quick ratio is 1:1, which means that liquid assets with immediate liquidity, such as cash, are equal to current liabilities, and all current liabilities can be repaid at any time.

Of course, the normal standards for current ratios and quick ratios will be different for different industries. It should be noted that the higher the two ratios, the better. High current ratio, i.e. too many current assets relative to current liabilities, which may be overstocking, too much cash or both; A quick ratio that is too high, i.e. too many liquid assets relative to current liabilities, indicates too much cash holdings.

The inventory backlog of the enterprise indicates that the enterprise is not operating well and there may be problems with the inventory; Holding too much cash indicates that the enterprise is not good at financial management and the use of funds is inefficient.