Research On The Current Ratio

For a long time ,people have held a disputed attitude toward current ratio which is one of the most important indicators to reflect a company's short-term ability to pay its debts. On one hand, it is favored for its simpleness in calculation. On the other hand, it is blamed for its shortcomings. Where should current ratio go? It is generally accepted that two is a suitable value for the current ratio. But can two work well in practice? These are some of the purposes of the paper. On basis of research on the functions and limitations of the current ratio, this paper perfects the method which was used to calculate current ratio. Furthermore, this paper also showed the calculation of the reference value of current ratio for some industries.This paper made a systematic research on current ratio through four chapters. In chapter 1 I advanced why I made a decision to research current ratio and reviewed the literatures about current ratio. In chapter 2 I expatiated the importance of a company's solvency and the short-term solvency ,also I summed up the role which the current ratio plays in the process of evaluating the short-term solvency of enterprises. In chapter 3 I discussed the existing problems of current ratio and its reference value. I revealed the shortcomings of the current ratio from the theoretical analysis and the deficiencies of current ratio reference value of 2 from the practical experience. I validated the current ratio reference value using the data of domestic listed company during 2001 to 2005.Surprising, I found that whether the entire industry or sub-sectors, the average current rate had a big differences with two. What we should paid more attentions was whether the entire industry average or the average of all sub-sectors showed a gradually decline trend. In chapter 4, based on the research of the former three chapters, I proposed amendments to the concept and calculation method of current ratio. At last, I advanced the method of calculating current ratio reference value including sub - horizontal and vertical reference value and calculated sub– horizontal current rates reference value for some industries which were calculated in 2005.