484

CORPORATION FINANCE

Here is an excellent illustration of the futility of trying to establish arbitrary
ratios for test purposes, except for the specific purpose that the test should
For example, in a hydroelectric plant or a railroad, the ratio of
serve,
current assets to funded debt is very low; in a merchandising or manufac-
turing business, it is usually much higher.
Koch found that for 1937 the ratio of current assets and current liabilities
to total assets for the indicated groups were as follows:^1

Group

Percentage of current
assets to total assets

Percentage of current
liabilities to total
assets

Trade | 63 | 34
Manufacturing | 39 | 17
Electric light and power        ... | 6 | 4
Telephone | 6 | 4
Railroads | 4 | 7
The same author found that the ratios of the sum of cash, receivables,
and inventory to total assets for the same year varied from 27 per cent for
small corporations to 18 per cent for medium-sized and to only 10 per cent
for large corporations.^2
Perhaps more important in many instances than the relationship between
current assets and current liabilities in measuring the current position of the
corporation is the comparison of cash, marketable securities, and receivables
with current liabilities. This comparison assumes that marketable securities
are actually marketable if necessary and that the receivables are owed by
solvent concerns. Still another test of the current position of a business is
the ratio of current liabilities to tangible net worth. As a measure of
liquidation possibilities, it has more weight than as a measure of the strength
of a going concern. Nevertheless, it helps to determine credit standing, even
for the latter, Creditors are inclined to agree with the slogan of the
Rothschilds which reads, "Do not trust a man who owes too much." For
business enterprises that have outstanding long-term debt, the ratio of total
liabilities to tangible net worth becomes significant. While deferred liabilities
are not so pressing as those that are current, they help to determine the
credit standing of the debtor. Not only their amount but their nature must
be analyzed. Early maturities weigh heavier than those postponed to a
future date.
^1 Koch, A. R, "The Financing of Large Corporations" (New York, 1943), pp. 42
and 31.
*1W., p. 18L