The COVID-19 coronavirus pandemic has upended both societal, healthcare, and
economic norms in truly unprecedented ways, all within the timeframe of a few (very hectic)
months. Focusing on the economic impacts, the blows dealt to global markets have forced
investors to rapidly adapt their fiscal strategies to meet the changing fiscal landscape. One of the
moist poignant areas investors have been evaluating is a company’s current liabilities, which are
defined as “short-term financial obligations that are due within one year or within a normal
operating cycle.” Liabilities that are often considered “current” include (but are not limited to)
accounts payable, notes payable, dividends payable, certain unearned or deferred revenues, and
portions of long-term debt nearing its maturity date (i.e., prepayment).​
As one may assume, the current liabilities are the portion of a company’s debt or other
liabilities coming due most soon, and therefore is closely associated with “current assets,” such
as cash on hand and other assets that may be liquidated within a year or one business cycle. Both
the current assets and current liabilities are normally designated on a company’s balance sheet,
and these totals are used to calculate a variety of short-term financial ratios. An example of this
is the “current ratio” which is calculated by dividing current assets by current liabilities, and
therefore provides a representation of how equipped a company is to pay off its current liabilities
with current assets. This and other similar ratios are cornerstones of fundamental financial
analysis, but there is great variety among industries regarding what is considered acceptable or
“healthy” ratio values. Some industries, such as manufacturing, maintain a current ratio industry
average of about 2.1, meaning that current assets could pay off current liabilities 2.1 times.
However, a number of industries maintain current ratios significantly lower than this. In fact, the
industry average for construction in Q1 of 2018 was 0.97, meaning that current liabilities could
not even be fully paid off by current assets if the company saw this as a necessary action.Each industry is affected in different degrees by a multitude of both internal variabilities
and externalities, but, like many things surrounding the COVID-19 coronavirus, financial
standards are being reimagined. This is especially true for those industries being forced to absorb
months’ worth of lost or forgone revenue due to closures and social distancing guidelines. The
airline industry, for example, already maintained relatively high debt loads and current ratio
averages around 1. Now, the industry has been largely immobilized, and only recently have some
areas around the world begun to allow civilian air travel again in sizeable numbers. This closure
of airports dramatically slashed their revenues, and therefore the company’s cash flows and net
income was reduced. Ultimately, their total cash or other current assets on the balance sheet are
reduced by these effects. Without normally expected revenue streams, the airlines, as well as
similarly affected industries like cruises, hotels/resorts, and casinos, are suddenly at significantly
heightened risk of being unable to manage current debt loads. The most immediate of these are
current liabilities, and a number of massive corporations, such as Carnival Cruise Lines,
Comcast, and others, are being forced to weaken long-term financial flexibility through
refinancing efforts. Indeed, what was once seen as standard or acceptable for many industries’
finances is being rapidly reevaluated as investors and managers seek to mitigate future risk
factors that may prove as significant as the current pandemic.

It has been widely stated that the post-coronavirus world will consist of a “new normal.”
The future of corporate management and investor expectations is certainly no exception, and
only time will tell just how severe the shifts in management practices will be. One thing,
however, is certain: in our globalized and rapidly changing world, new opportunities are matched
by new risks. The current pandemic has made known the influence that certain externalities may
have on a company’s sustainability and success, and managing parties will be forced to adjust
themselves for the “new normal” now taking shape.

Sources:
● Average current ratios by industry. (n.d.). Retrieved June 08, 2020, from
https://wellsfargoworks.com/management/infographic/average-current-ratios-by-industry
● Tuovila, A. (2020, June 01). Current Liabilities Definition. Retrieved June 08, 2020, from
https://www.investopedia.com/terms/c/currentliabilities.asp
● https://jafas.org/articles/2016-2-2/5_Airline_FULL_TEXT.pdf

Author: Andy Colando

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