Current Ratio, Debt Ratio! - Fast withdrawals without delays on crypto digital currency exchange platforms

Current Ratio = Current Assets / Current Liabilities

Debt-to-Asset Ratio = Total Liabilities / Total Assets

Simply put,

A company operates with debt,

which includes long-term loans borrowed from banks,

temporary working capital loans,

accounts payable formed by purchasing goods first and paying later from suppliers,

and so on—all are the company’s liabilities.

Among these,

those that need to be paid in the short term,

or within one year,

are called current liabilities.

Current assets,

are the assets that can be converted into cash within a relatively short period,

such as cash and cash equivalents,

trading financial assets,

accounts receivable,

inventory, etc.

Therefore,

the current ratio,

measures the company’s ability to repay its current liabilities.

My understanding,

if the current ratio is less than 1,

it means the company’s cash,

plus liquid assets that can be quickly sold,

are not enough to cover current liabilities.

In other words,

if short-term creditors come knocking,

the company cannot pay them all.

In this situation,

there are three ways to respond:

1. Make more money

If there is continuous operational cash flow,

it can help with turnover.

However,

when we consider this issue,

it’s often because the operating net cash flow is too small,

or even negative,

insufficient to handle cash turnover. What should we do then?

2. Bring in new shareholders

For listed companies,

this means a private placement,

introducing new shareholders,

who invest new funds,

which can also ease cash flow pressure.

However,

the process of private placement,

is often complicated,

takes a long time,

and cannot solve urgent needs immediately.

More importantly,

private placement,

may not always be approved,

sometimes it’s just wishful thinking.

Additionally,

if the goal is only to ease the company’s cash flow pressure,

new shareholders can demand better (cheaper) terms.

In normal business negotiations,

when providing timely help,

the price should be higher.

So,

if the stock price is driven too high,

far from the company’s intrinsic value,

the logical conclusion,

is that no one would be willing to become a new shareholder at that price.

Because,

in this case,

it’s essentially a loss-making move,

which will be heavily reflected in goodwill.

Of course,

if there are other considerations,

abnormal situations may occur.

Another method,

is rights issue,

which is essentially asking existing shareholders for money.

3. Borrow new to repay old

When old debts mature,

new loans can be taken to repay them,

which also helps with cash flow.

However,

when the debt snowball gets bigger and bigger,

banks, considering the risk,

may suddenly refuse to lend.

The most terrifying scenario,

is that banks withdraw credit due to risk concerns.

If debt keeps rolling over,

it can last a long time,

but if banks suddenly stop lending,

or cannot lend anymore,

the entire chain can easily collapse.

At this point,

indicators like the debt-to-asset ratio,

become relatively more important.

The debt-to-asset ratio,

represents how much of a company’s total assets are borrowed.

My understanding,

if the proportion of borrowed funds becomes heavier,

it becomes more difficult to continue borrowing.

There is also an extreme situation,

which is debt-to-equity swap.

Not convertible bonds,

but when the debt cannot be repaid,

through negotiations,

the borrowed debt is converted into company equity,

making the debt holders shareholders,

and thus avoiding repayment.