Liquidity (Current Ratio)
Proxy: Current Ratio (CR)
Definition & Description
The Current Ratio (CR) is the most commonly used liquidity ratio to measure a company's ability to meet its short-term debt obligations using its current assets (such as cash, receivables, and inventory).
How to Use (Panel Data)
In accounting research, CR is often used as an independent variable to predict financial distress, capital structure, or stock returns. It is also a proxy for the margin of safety of operations.
Full Explanation Article
The ideal CR varies by industry, but generally, a CR above 1.0 (or 100%) indicates sufficient current assets to cover short-term liabilities.
If CR is too high (e.g., > 3.0), it may indicate inefficient asset management (idle cash or unsold inventory).
If CR is too low (< 1.0), the company faces high technical bankruptcy risk if creditors demand repayment simultaneously.
Related Reference Journals
- [1]Horngren, C. T., Harrison, W. T., & Oliver, M. S. (2012). Accounting.
- [2]Brigham, E. F., & Houston, J. F. (2019). Fundamentals of Financial Management.
Research Ideas
The Impact of Liquidity, Profitability, and Solvency on Dividend Policy.
Analysis of Current Ratio's Effect on Stock Returns for Manufacturing Firms During Crises.
Frequently Asked Questions (FAQ)
What is the difference between this proxy and regular accounting variables?
For detailed information about this proxy, please refer to the article above. NgepetData can automatically extract the required data from your PDF Annual Report.
Where does the data come from to calculate this proxy?
For detailed information about this proxy, please refer to the article above. NgepetData can automatically extract the required data from your PDF Annual Report.
Can this proxy be used for all industry sectors?
For detailed information about this proxy, please refer to the article above. NgepetData can automatically extract the required data from your PDF Annual Report.