Optimal Value of Current Ratio

Abstract

This article deals with the optimal value of current ratio. The paper originated in response to two contradictory statements. The first one states that working capital should be positive, i.e. that current assets are higher than current liabilities. The second statement states that current assets should be paid from short-term sources and fixed assets from long-term sources. This would mean that current assets should be equal to current liabilities. The dependence of current ratio on business success expressed by indicators of profitability - return on assets (ROA) and return on equity (ROE) - was measured on a sample of over four thousand Czech companies. It has been found that for companies with inventory, the ROE rises up to the value of current ratio of 2.5, although the growth rate decreases with increasing liquidity, which means that it is more advantageous for them to have positive working capital, where the amount of assets exceeds the current liabilities 2.5 times. The dependences regarding the ROA and for companies with no inventory cannot be generalized according to the conducted research.