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Review: US Stock Financial Statements for Beginners 

Hey, tigers：Today is our fourth day of "Learn US financial statements".

In this article, I mainly introduce: How to determine the solvency of a company? ?

In short, we can focus on the current and quick ratios derived from the financial statements.

When these indicators are well below 1, there is a great likelihood that the company has liquidity problems.In today's article, we will focus on these two financial indicators.

1. Current ratio

First, let's take a look at how the current ratio is calculated.Current ratio is the ratio between current assets and current liabilities.

The higher the current ratio, the higher a company's liquidity and the greater its ability to pay off its current liabilities.Generally speaking, a current ratio above 2 is considered excellent, while a current ratio below 1 indicates the possibility that a company may run into a short-term liquidity squeeze.

A current ratio above 2 indicates that current assets are at least twice the amount of current liabilities. Even if half of the current assets cannot be quickly converted into cash, a company will still be able to pay off its current liabilities.

We typically view such a company as possessing adequate liquidity.Some of you might ask: ''Is it always better for a company to have a high current ratio?''My answer is: not always.

There are two possible explanations for an excessively-high current ratio: high inventory or high cash position.

A high inventory indicates that the company has trouble selling its products, likely due to the lack of the product's competitiveness in the market. On the other hand, high cash position indicates that the company’s capital utilization is low, and that it is not being operated at its full potential.

So, as you can see, there's not one optimal current ratio for all companies, and we shouldn't judge a company's health based on this value alone.

2. Quick ratio

Now let's take a look at how to calculate the quick ratio.The quick ratio is the ratio of quick assets to current liabilities.The quick ratio is a measure of a company's ability to quickly turn current assets into cash to pay off debt.

Quick assets equal current assets less inventory and other current assets. A company's quick ratio is, in turn, the ratio between its quick assets and its current liabilities.The good news is that you don't have to calculate these ratios yourself!

Just enter the stock code into your personal Tiger Trade app, find ''Company'' and click ''Details''. Then select ''Financial Analysis'' to view both the current and quick ratios.So, now that we know what a quick ratio is, how can we use it?

Normally, a quick ratio of 1 or above is optimal, which means that every $1 of current liability is readily covered by at least $1 of liquid assets. A quick ratio below 1 demonstrates that a company may run into a short-term liquidity squeeze.

On the other hand, while a quick ratio above 1 shows ample cash flow, it can also be an indicator of poor cash management.

A higher quick ratio is not always better. We need to analyze it on a case-by-case basis while considering the nature of the target company’s industry.

For example, the retail sector trades good for cash directly, and has almost no accounts receivable. Consequently, it's reasonable to have a current ratio far below 1 in the retail sector.

On the other hand, although the quick ratio of a company may be greater than 1, the majority of its quick assets may be accounts receivable.

In this case, despite the quick ratio, whether or not the company is ready to service its debt could be dependent on its ability to collect the accounts receivable quickly.Consequently, we should evaluate the quick ratio in the context of the company's realistic ability to turn over its accounts receivable.

Quite easy so far, right?

Now with the knowledge of these two ratios, you can judge a company's likelihood of defaulting.

Now let's summarize:

the current ratio and the quick ratio are two important metrics to help you assess the liquidity of a company. With these two ratios, we can quickly tell whether a company is likely to default.

Here is the course link:  US Stock Financial Statements for Beginners

Share this course with tigers.​​ you will get 20-50 coins