Financial Ratio Analysis - Liquidity - Additional question 14 answer

Liquidity - Additional question 14 answer

Whilst different industries have different characteristics, and therefore should have different working capital ratio values, we can't say that retailing and transport in the UK are radically different from each other in that both industry samples have the same values as each other. Nevertheless, the average current and acid test ratios do show some differences:

Industry Averages for the latest year Retail Transport
Current ratio 0.7 1.7
Acid Test ratio 0.6 1.7

Overall, and as we should expect, retailing, a cash based industry, has significantly lower working capital ratios.

Moreover, our discussions in questions 12 and 13 and our findings here help to prove that there can be no such thing as an overall ideal ratio value. However, we can begin to say that there might be an ideal, or at least a target, value for a ratio value.

Back to Additional question 14.

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