Liquidity: can they pay what's due this year?
A supplier is asked to give Kohl's longer to pay. Measure the retailer's short-term liquidity from its 10-K, see what the ratios can't tell you, and write a credit decision.
FinanceReading the accounts like an analystAbout 9 min: 9 readingUpdated
General education, not financial advice.
- Calculate the current, quick and cash ratios and operating cash flow against current liabilities
- Explain what seasonality, credit lines and the make-up of current assets do to those ratios
- Write a short credit decision with limits and triggers
Builds toward: Judge a company. Read a company's accounts, apply Graham's tests, and make a rough valuation.
Reading the accounts like an analyst: lesson 11 of 14
- Reading the accounts like an analyst
- The three statements and how they link 10 min
- Common-size statements and trends 9 min
- Profitability ratios: margins, ROA and ROE 9 min
- Efficiency ratios and the cash conversion cycle 9 min
- DuPont analysis: where ROE comes from 10 min
- Reading the cash flow statement like an analyst 9 min
- Profit against cash: accruals and earnings quality 11 min
- When is a sale a sale? Revenue timing and channel stuffing 10 min
- The expense side: capitalised costs, reserves and big baths 8 min
- The Beneish M-score: a screen for manipulation, and its limits 10 min
- Liquidity: can they pay what's due this year? 9 min
- Solvency and cover: can they carry their debt? 8 min
- Leases and hidden debt 8 min
- Writing a credit view 9 min
Pairs with any financial statement analysis text (the chapter on credit analysis: liquidity)
Mission
This is an exercise in analysis on a real filing, not a recommendation to lend to, buy or sell any company.
From: the credit manager of an apparel supplier that sells to Kohl's Due: Thursday, half a page
Kohl's has asked us to move from 45-day to 60-day payment terms on about 40 million dollars a year of orders. Its credit ratings have been cut three times in two years. Using its 10-K for the year to 31 January 2026 (filed 19 March 2026), tell me whether it can pay what it owes in the next year, what the ratios miss, and what limits or warning signs we should set if we agree.
The documents (Kohl's Corporation, Form 10-K for the year to 31 January 2026; millions of dollars):
| Balance sheet | 31 Jan 2026 | 1 Feb 2025 |
|---|---|---|
| Cash and cash equivalents | 674 | 134 |
| Merchandise inventories | 2,745 | 2,945 |
| Other current assets | 272 | 309 |
| Total current assets | 3,691 | 3,388 |
| Accounts payable | 1,171 | 1,042 |
| Accrued liabilities | 1,181 | 1,263 |
| Borrowings under revolving credit facility | – | 290 |
| Current portion of long-term debt | – | 353 |
| Current lease liabilities (finance and operating) | 179 | 183 |
| Total current liabilities | 2,531 | 3,131 |
| Year | 2025 | 2024 |
|---|---|---|
| Total revenue | 15,527 | 16,221 |
| Cost of merchandise sold | 9,228 | 9,661 |
| Operating cash flow | 1,380 | 648 |
From the 10-K: Kohl's has a 1.5 billion dollar senior secured, asset-based revolving credit facility (undrawn at the year end); in 2025 it issued 360 million dollars of 10.000% senior secured notes due 2030 and repaid 353 million of 4.25% notes at maturity; S&P cut its senior unsecured rating from BB to BB− in 2024; Moody's cut its rating from Ba3 to B1 in 2024 and its senior unsecured rating from B1 to B3 in 2025. Operating income for 2025 includes a 129 million gain on a legal settlement, received in cash. Supplier finance programme obligations were 201 million at the year end (97 million a year earlier), and cash dividends paid fell from 222 million to 56 million. Borrowings help fund "seasonal working capital needs".
What it is
The toolkit for this job.
The ratios.
- Current ratio = current assets ÷ current liabilities.
- Quick ratio = (cash + short-term investments + receivables) ÷ current liabilities: current assets without stock and prepayments.
- Cash ratio = (cash + short-term investments) ÷ current liabilities.
- Operating cash flow ratio = operating cash flow ÷ current liabilities (often on the average for the year).
- Days payable = payables ÷ cost of sales × 365: how long the company takes to pay suppliers now.
What the ratios don't show.
- The make-up of current assets. Stock has to be sold before it's cash; in a falling market it may sell below cost.
- Seasonality. A retailer's year end often falls after the holiday season, when stock is low and cash high: the best day of the year for its ratios.
- Credit lines. An undrawn revolving facility is liquidity the balance sheet doesn't show, but an asset-based one depends on a borrowing base (usually stock and receivables) and on covenants.
- What a supplier ranks behind. Secured lenders are paid from the assets pledged to them before unsecured creditors such as trade suppliers.
Questions an analyst asks
- What falls due in the next year, and what will pay for it: cash, operations, or new borrowing?
- How much of current assets is stock, and how quickly does it turn into cash?
- Is the year-end picture typical, or the best day of the year?
- How much undrawn credit is there, and what could stop the company using it?
- Where does a trade supplier rank if things go wrong?
Why it matters
Liquidity is about the next twelve months. Companies rarely fail because their long-term debt is too large; they fail because they can't pay what is due now. For a supplier, a lender or an investor in short-term debt, these few ratios and the notes behind them are the first test, and the most common mistake is to stop at the current ratio.
Worked example
An imaginary furniture retailer, Thornby (millions): cash 40, receivables 20, stock 340, current liabilities 300, operating cash flow 60, and an undrawn 150 credit line secured on its stock.
- Current ratio = 400 ÷ 300 = 1.33: looks comfortable.
- Quick ratio = 60 ÷ 300 = 0.20: over four-fifths of current assets is stock.
- Operating cash flow ratio = 60 ÷ 300 = 0.20.
- If stock sales slowed, the credit line would shrink with the stock it is secured on, just when it is needed.
Common mistake
Reading a current ratio above 1 as "liquid". For a retailer whose current assets are mostly stock, the quick ratio, operating cash flow and the credit line tell you far more, and the year-end date can flatter all of them.
Key terms
- current ratio
- current assets ÷ current liabilities
- quick ratio
- (cash + short-term investments + receivables) ÷ current liabilities
- cash ratio
- (cash + short-term investments) ÷ current liabilities
- asset-based facility
- a revolving loan whose limit depends on a borrowing base of stock and receivables
- secured debt
- debt with a claim on specific assets, paid from them first in a default
Practise the key terms
Tap a card to turn it over. 5 cards.
| Front | Back |
|---|---|
| current ratio | current assets ÷ current liabilities |
| quick ratio | (cash + short-term investments + receivables) ÷ current liabilities |
| cash ratio | (cash + short-term investments) ÷ current liabilities |
| asset-based facility | a revolving loan whose limit depends on a borrowing base of stock and receivables |
| secured debt | debt with a claim on specific assets, paid from them first in a default |
Task
Write the half-page credit note for the credit manager:
- the current, quick and cash ratios, the operating cash flow ratio and days payable, for both year ends;
- what the ratios miss for this company;
- your decision on 60-day terms and the limit you'd set;
- the warning signs that would make you shorten terms again.
Model answer
Show the model answer
| 31 Jan 2026 | 1 Feb 2025 | |
|---|---|---|
| Current ratio | 1.46 | 1.08 |
| Quick ratio (cash only; no receivables shown) | 0.27 | 0.04 |
| Cash ratio | 0.27 | 0.04 |
| Operating cash flow ÷ current liabilities (1) | 0.55 | 0.21 |
| Days payable | 46 | 39 |
(1) On year-end current liabilities: 1,380 ÷ 2,531 and 648 ÷ 3,131. Days payable: 1,171 ÷ 9,228 × 365 = 46.3; 1,042 ÷ 9,661 × 365 = 39.4.
Kohl's: able to pay this year; agree 60 days with a limit and monthly triggers · Source: Form 10-K, year to 31 January 2026
Liquidity improved a lot in 2025. Current liabilities fell by 600 million as Kohl's repaid 353 million of notes and its 290 million revolver drawing; cash rose to 674 million; operating cash flow doubled to 1.38 billion, about 1.25 billion without the 129 million legal settlement received in cash, which won't recur. Its 1.5 billion credit line was undrawn at the year end.
What the ratios miss. Three-quarters of current assets is stock, so the quick and cash ratios (0.27) matter more than the current ratio (1.46), and the January year end is after the holiday season, when stock is lowest and cash highest: mid-year liquidity is tighter. The credit line is asset-based and secured, as are the new 10% notes; as an unsecured trade creditor we rank behind both. Three rating cuts in two years and a 10% coupon on new debt show lenders see real risk; the dividend cut from 222 million to 56 million shows the company protecting cash. Supplier finance obligations doubled to 201 million: some suppliers are already being paid later through a bank.
Decision: agree 60 days with a credit limit of about 7 million dollars (60 days of orders at 40 million a year), reviewed quarterly.
Shorten terms again if: Kohl's draws heavily on the revolver outside its usual season; operating cash flow falls below about 1 billion a year; days payable to all suppliers stretch well beyond 50, or supplier finance obligations keep rising (signs it is funding itself from suppliers); or ratings fall further.
How the expert gets there. They separate what falls due from what will pay for it, look at the make-up of current assets before the totals, and ask what the year-end date hides. They read the debt notes for security and covenants, because they decide where a trade creditor stands. Then they turn the analysis into a limit and triggers that someone can monitor.
What a reviewer would flag:
- "Current ratio 1.46, so fine": three-quarters of it is stock.
- Ignoring that the year end is the best day of the year for a retailer's cash.
- Missing that the supplier ranks behind secured lenders.
- A decision with no limit or no triggers.
Practice
Transfer: an aircraft maker. Boeing's balance sheet at 31 December 2025 (Form 10-K filed 30 January 2026) shows current assets of 128.5 billion dollars and current liabilities of 108.1 billion: a current ratio of 1.19. Open the balance sheet. In three sentences: is Boeing's short-term liquidity as the current ratio suggests, and what would change your mind?
A model answer
The current ratio says little either way: most of both sides are not cash. Inventories are 84.7 billion of the 128.5 billion of current assets (largely aircraft and work in progress), and 59.4 billion of current liabilities are advances and progress billings from customers, which are settled mainly by delivering aircraft, not by paying cash. The cash measures are what matter: 10.9 billion of cash and 17.2 billion of short-term and other investments (28.2 billion together) against 8.5 billion of debt due within a year, with operating cash flow of only 1.1 billion in 2025. What would change my mind: operating cash flow falling back below zero, delivery delays that turn advances into refunds, or cash and investments falling towards the debt due.
How the expert gets there: when a ratio looks ordinary, they still read the lines; here neither the biggest asset nor the biggest liability is cash.
What a reviewer would flag: treating customer advances like loans; ignoring the short-term investments.
In short
- Current, quick and cash ratios, and operating cash flow against current liabilities.
- Look at what current assets are made of; stock isn't cash.
- Year-end dates can flatter liquidity, especially for retailers.
- Credit lines add liquidity, but check security, the borrowing base and covenants.
- Turn the analysis into a decision with limits and triggers.
Check yourself
Answer in your head first, then open the answer. Nothing is saved.
Current assets 500 (of which stock 350), current liabilities 400, cash 100. What are the current and cash ratios?
Show answer
1.25 and 0.25.
Why might a retailer's liquidity look best at its year end?
Show answer
Its year end is often just after the peak selling season, when stock has been turned into cash and seasonal borrowing repaid.
Why does it matter to a trade supplier that a company's new debt is secured?
Show answer
Secured lenders are paid first from the pledged assets in a default, leaving less for unsecured creditors such as suppliers.
Further reading
- Kohl's Corporation, Form 10-K for the year ended 31 January 2026; The Boeing Company, Form 10-K for 2025 (SEC EDGAR).
- Corporate Finance Institute, Financial Analysis Glossary (liquidity ratios).
- On this site: Efficiency ratios and the cash conversion cycle.
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