122 ShowMetheMoney
higher current ratios than these, aroun d3.5, with Amazon.com’s
fluctuating from negative to 4.5, depending on its borrowing levels
for investment in new businesses.
This range of ratios reflects different corporate needs as well as
unique funding situations (called the net trade cycle, or the rela-
tionship between desired investment in inventory compared to the
relationship between credit extended and credit taken). Amazon.com
has at times operate dwith negative working capital, which, given
the retail nature of its business with low inventory an dlow accounts
receivable, is safe an din dee da goo din dicator of value from man-
aging working capital. Microsoft’s relatively high ratio is due in large
part to the fact that it generates enormous amounts of cash in its
operations. GE an dits peers exhibit the usual characteristics of rel-
atively mature businesses, though GE constantly tries to reduce the
amount of working capital it requires to zero.
You can fine-tune your analysis even more by looking only to
highly liqui dassets, exclu ding assets such as inventory an dprepai d
expenses. This leaves cash (liquidity itself) and assets such as ac-
counts receivable that are due in shorter periods (say, within three
months). This more refine dtest is known as thequick ratioand
sometimes (equivalently) as either theliquidity ratioor theacid test
ratio.
Rules of thumb still apply. A minimum quick ratio of 1 is desir-
able, an dhigher ratios are generally better—up to a point. This is
useful to know because of what it reveals about the relative level of
the current ratio. For example, a current ratio within a seemingly
satisfactory range (say, between 1.4 an d2) coul dactually be high
largely as a result of excessive inventory levels. Since a business can-
not pay debts with inventory, there is reason to worry about a com-
pany’s ability to pay its debts as they come due if it has a low quick
ratio even while sporting a high current ratio.
Conglomerates such as GE ten dto have a relatively wi der gap
than do other businesses between the current ratio and the quick
ratio. As a segment, the conglomerate current ratio of aroun d1.5,
compare dto a quick ratio of about .8, reflects the fact that most of
the current assets are neither cash nor short-term accounts receiv-
able. The ban dis tighter in the more liqui dbusinesses of computers
an don-line retail sales, where there are spee dier assets in the cur-
rent ratio (2.75 an d2.6 in the computer in dustry an dabout 3.5 an d
2.5 in the specialty retailer segment). These variations reflect the
range of operating environments in these businesses an dalso show