Liquidity, gearing and the working capital cycle

Liquidity

$\text{Tỷ số thanh toán hiện hành}=\dfrac{\text{tài sản ngắn hạn}}{\text{nợ ngắn hạn}}$ — often quoted as ideally around $2\!:\!1$, but the right level depends entirely on the industry.

$\text{Tỷ số thanh toán nhanh}=\dfrac{\text{tài sản ngắn hạn}-\text{tồn kho}}{\text{nợ ngắn hạn}}$ — inventory is removed because it is the hardest current asset to turn into cash quickly.

A very high current ratio is not automatically good: it can mean cash sitting idle, inventory not selling, or customers not paying.

The working capital cycle

$\text{Chu kỳ} = \text{kỳ tồn kho} + \text{kỳ thu tiền} - \text{kỳ trả tiền}$. This is the number of days the business finances its own operations. Shortening it releases cash without any new borrowing — which is why examiners like it as a recommendation.

Gearing

$\text{Đòn bẩy}=\dfrac{\text{nợ dài hạn}}{\text{vốn sử dụng}}\times100$, and $\text{Hệ số chi trả lãi vay}=\dfrac{\text{lãi trước lãi vay và thuế}}{\text{lãi vay}}$.

High gearing magnifies returns to shareholders when profits are good and magnifies losses when they are not; interest must be paid whatever happens, while dividends need not be. Interest cover is the more practical measure because it asks whether the business can actually service the debt from this year's profit.

Profit is not cash

A profitable business fails when cash runs out. Profit is recognised when a sale is made; cash arrives when the customer pays. Rapid growth is dangerous precisely because inventory and receivables absorb cash before the profit converts — the phenomenon called overtrading.