The year-end statement shows THB 51 million in current assets and THB 33 million in current liabilities, giving a current ratio of about 1.55. If a supplier calls today to ask when it will be paid, that ratio cannot say when cash will reach the bank.
Current assets combine cash, receivables, inventory, and items that take time or require conditions before becoming cash. Current liabilities have different due dates and settlement methods. A business can show more assets than liabilities yet collect from customers after payroll is due.
Read liquidity balances alongside receipt and payment dates and operating cash flow. Here the same hypothetical equipment seller and systems integrator is compared across equal 12-month years 1 (Y1) and 2 (Y2), in THB millions. The measures tell different stories; these figures are neither a credit-approval threshold nor real company results.
The current ratio is a snapshot
Current ratio equals current assets divided by current liabilities. In year 1, the company has THB 37 million of current assets and THB 27 million of current liabilities, giving 1.37. Year 2 rises to 51 ÷ 33, or about 1.55.
Year 2 current assets consist of THB 6 million cash, THB 22 million receivables, THB 13 million equipment inventory, THB 9 million contract assets, and THB 1 million prepaid expenses. One total shows size but conceals what can be spent at once and what still needs work.
| Item | Year 1 | Year 2 |
|---|---|---|
| Cash | 4.00 | 6.00 |
| Trade receivables | 16.00 | 22.00 |
| Equipment inventory | 10.00 | 13.00 |
| Contract assets | 6.00 | 9.00 |
| Prepaid expenses | 1.00 | 1.00 |
| Total current assets | 37.00 | 51.00 |
| Total current liabilities | 27.00 | 33.00 |
| Current Ratio | 1.37 times | 1.55 times |
Year 2 current liabilities include THB 11 million equipment payables, THB 5 million accrued operating expenses, THB 9 million customer advances, and THB 8 million interest-bearing debt due in the short term. Some advances are obligations to deliver goods and services, not necessarily THB 9 million cash refunds on one day. They still bring costs and contractual duties.
A ratio above 1 does not guarantee payment on every due date. Examine asset quality, the time needed to turn assets into cash, and actual obligation dates. If year-end balances differ greatly from the rest of the year, examine within-year trends too.
The quick ratio excludes some items that take longer
This article defines quick ratio as cash plus trade receivables that are unconditional payment rights except for time, divided by current liabilities. It excludes inventory, prepayments, and contract assets. Other sources may define it differently; always state the components in a report.
Year 1 gives (4 + 16) ÷ 27 = 0.74; year 2 gives (6 + 22) ÷ 33 = about 0.85. It rises along with the current ratio, but receivables still await collection. It is not immediately spendable cash.
Year 2 quick ratio as defined here
(Cash 6 + receivables 22) ÷ 330.85 times
Do not conclude that a quick ratio below 1 proves distress. A business paid before it delivers and one that delivers before collecting have different timing. Conversely, a seemingly liquid receivable may be disputed. Read terms and aging, rather than changing formulas and treating the answer as complete.
For cash alone, cash ratio is cash divided by current liabilities: 4 ÷ 27, about 0.15 in year 1, and 6 ÷ 33, about 0.18 in year 2. This is narrower than quick ratio because it excludes receivables, but even it does not guarantee that every baht is available for immediate debt payment. For analysis, this model assumes THB 2 million of cash reserved for operations. It is not legally restricted or a standard minimum for every company. A real business must examine its payment obligations and cash-use conditions.
Operating cash flow tells a different story from profit
Cash from operations (CFO) shows cash flows classified as operating activities during the period. The example company's net profit rises from THB 10.4 million to THB 12.4 million, but CFO falls from THB 12.4 million to THB 11.4 million. A bridge from profit to cash shows where the difference sits.
Depreciation is an expense with no cash payment in the period of recognition, so the indirect method adds it back. Growth in receivables, inventory, and contract assets uses cash or has not yet become cash. Growth in payables, accrued expenses, and customer advances offsets some cash needs.
| Cash-flow adjustment | Year 1 | Year 2 |
|---|---|---|
| Net profit | 10.40 | 12.40 |
| Add depreciation | 5.00 | 6.00 |
| Increase in receivables | −4.00 | −6.00 |
| Increase in inventory | −2.00 | −3.00 |
| Increase in contract assets | −2.00 | −3.00 |
| Increase in equipment payables | 2.00 | 2.00 |
| Increase in accrued expenses | 1.00 | 1.00 |
| Increase in customer advances | 2.00 | 2.00 |
| CFO | 12.40 | 11.40 |
In year 2, THB 12.4 million net profit plus THB 6 million depreciation totals THB 18.4 million. The net effect of changing operating balances then draws THB 7 million from that amount, leaving CFO of THB 11.4 million. Prepaid expenses do not change, so they create no adjustment in the table.
From profit to cash, year 2
12.40 + 6.00 − 7.00CFO: THB 11.40 million
This case assumes cash interest and tax are classified in CFO and have no outstanding timing differences. For real statements, check the company's classification policy and actual items. Do not use this shortened table as every company's cash-flow statement.
Positive CFO still requires a look at investing and financing
Year 2 CFO is positive THB 11.4 million, but the company spends THB 9 million acquiring assets, borrows a net THB 4 million, and pays THB 4.4 million in dividends. Cash therefore rises by a net THB 2 million, from THB 4 million to THB 6 million. To explain a higher year-end balance, read every flow behind it.
| Item | Year 1 | Year 2 |
|---|---|---|
| Opening cash | 5.00 | 4.00 |
| Cash from operations | 12.40 | 11.40 |
| Asset purchases | −7.00 | −9.00 |
| Net increase in borrowings | 3.00 | 4.00 |
| Dividends | −9.40 | −4.40 |
| Ending cash | 4.00 | 6.00 |
A net THB 4 million rise in borrowing does not show that no principal was repaid during the year. The model has only the net figure; drawdowns and repayments may both have occurred. It cannot establish installment-level debt service without an actual principal-and-interest schedule.
Investment also needs to be separated into maintaining existing capacity and creating future revenue. Dividends are another choice for cash. Slower CFO does not prohibit investment, but requires closer attention to financing sources and when obligations fall due.
Use cash-flow ratios to prompt a closer look
CFO divided by net profit is 1.19 in year 1 and 0.92 in year 2. Operating cash relative to profit has weakened in this period. One year below 1 does not prove unreliable profit; growing credit sales, inventory preparation, or billing timing may explain it. Check multiple periods and the causes of changed balances.
Another view is full-year CFO divided by average current liabilities. In year 1, average current liabilities are (21 + 27) ÷ 2 = THB 24 million, giving about 0.52. Year 2 uses (27 + 33) ÷ 2 = THB 30 million, giving 11.4 ÷ 30 = 0.38. This measure declines even as the current ratio rises because it compares different things.
Some improving ratios can coexist with growing cash pressure. In this case, track receivables and work still subject to payment conditions, along with rising obligations. A year-end current ratio of 1.55 alone cannot certify liquidity for the year.Asset coverage improves, but operating cash relative to average obligations falls
Year-end snapshot, times
Chart scale: 0 to 2 times
Use assets as defined divided by current liabilities on the same year-end date
Current Ratio
Quick ratio as defined here
Cash Ratio
Full-year cash compared with average liabilities, times
Chart scale: 0 to 1 time
Full-year cash flow divided by average current liabilities, a different base and scale from the upper panel
CFO ÷ average current liabilities
Separate confirmed from pending receipts in the cash plan
Before approving a large payment, lay out customer receipts against available evidence: due dates, amounts customers have confirmed, and conditions still outstanding. Put payroll, supplier payments, tax, debt, and investment on the same timeline. Keep confirmed receipts separate from hoped-for ones.
For SI work awaiting acceptance, the project manager may need to resolve the item; accounting alone cannot collect it. In a factory, slow-moving stock may still be essential to production, so speak with production and purchasing before cutting it. If a major customer delays payment, identify the affected period and options under the contract.
With Odoo or another ERP, connect receivables aging, due dates, purchase orders, and project plans so owners can verify changes. Forecasting receipts and payments is a separate task with assumptions to define and revisit. Do not label a report of recorded accounting transactions a future cash plan without adjustment.
Before saying cash is sufficient, name the date and conditions
“Liquidity is healthy” should come with the period assessed, credible receipts, and obligations included. If a customer has not confirmed payment or there is no debt-service schedule, state that condition instead of importing certainty from a ratio.
Choose the next large payment and identify which cash will cover it, on what date, who confirms it, and what decision follows if collection slips. A real date is more useful than debating whether the current ratio should be 1.5 or 2 without knowing the business's timing. Next we examine interest-bearing debt and interest coverage separately from operating liabilities.
For more on liquidity ratios, see CFA Institute, Financial Analysis Techniques For the distinction between profit, cash flow, and activity classifications, see IFRS Foundation, IAS 7 The calculations and follow-up plan are hypothetical, not conclusions about any company's liquidity.
