Financial Ratio Analysis - Liquidity - Additional question 12 answer

Liquidity - Additional question 12 answer

  Marks & Spencer Safeway Sainsbury Tesco Thorntons
  2002 2001 2002 2001 2002 2001 2002 2001 2001 2000
Current ratio 2.1 1.8 -0.5 -0.4 0.8 0.9 0.4 0.4 0.7 0.8
Acid Test ratio 2.0 1.5 -0.2 -0.2 0.6 0.7 0.2 0.2 0.4 0.3

The first thing to notice here is that only M&S has a current ratio of around 2:1 and none of them has an acid test ratio value of 1: 1 ... these are all highly successful businesses and they are surviving on working capital ratios that are even negative in the case of Safeway.

These results help us to appreciate that there is no such thing as an ideal ratio value EXCEPT that the business itself will set its own ratio targets and will work to maintain or achieve them.

That is, M&S is presumably happy with a current ratio of around 2: 1, Safeway is presumably happy with a negative current ratio; and so on for all business in this sample: all retailing business, by the way, in case you hadn't spotted!

As a matter of interest, the following table shows the supermarket industry's overall working capital ratios for the years shown:

Supermarkets 1988/89 1989/90 1990/91
Current ratio 0.6 0.6 0.6
Acid Test ratio 0.3 0.3 0.4

Retailers have been working with such low working capital ratios for a long time, then.

Back to Additional question 12.

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