The Current Ratio and Interrelationships of Working Capital Items

This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research

Volume Title: The Pattern of Corporate Financial Structure: A Cross-Section View of Manufacturing, Mining, Trade, and Construction, 1937

Volume Author/Editor: Walter A. Chudson

Volume Publisher: NBER

Volume ISBN: 0-870-14135-X

Volume URL: http://www.nber.org/books/chud45-1

Publication Date: 1945

Chapter Title: The Current Ratio and Interrelationships of Working Capital Items

Chapter Author: Walter A. Chudson

Chapter URL: http://www.nber.org/chapters/c9213

Chapter pages in book: (p. 67 - 80) .5. THE CURRENT RATIO AND INTERRELATION- SHIPS OF WORKING CAPITAL ITEMS

ALTHOUGH THE VARIATIONS in individual working capital components, which we have traced thus far, are of independent interest, one important question concerning them naturally arises:Are these variations interrelated to some degree? For example, do industrial differences in notes payable parallel industrial differences in inventory holdings? Similar questions maybe asked with reference to the classifications by corporate size and profitability. C The most general basis for a consideration of such questions is the C relationship between current assets and current liabilities as a e wholethat is, the current ratio.1

THE CURRENT RATIO The current ratio occupies a time-honored position in the litera- ture of financial structure, primarily becauseof its use as a guide in the analysis and prognosis of corporate solvency orfinancial strength. For the present study a brief treatment of the ratiowill suffice to summarize the net effect of the individual variationsof current assets and liabilities previouslydiscussed. In certain cases the variations of the current ratio are the product of a constant numerator combined with a changingdenominator; and in others the reverse is true. We shall therefore include in ourdiscussion an examination of total current assetsand total current liabilities, separately. Indus trial Variations The exceptionally highor exceptionally lowcurrentratio for a particular industry mayfrequently be traced to some individual component of the ratio. For example, tobaccoproducts has the 1The current ratio is defined a. the ratio of cash, marketablesecurities, receivables, and inventory to accounts payable, notes payable, and "otherliabilities" In the reports of the Bureau of Internal Revenue for 1937,"other liabilities" consist primarily of accrued items which properly belong with current liabilities. 67 Pattern of FinancialStructure highest ratio of all the minor industrial divisions (Chart 8and Data Book, Table C-28), reflecting primarily theextremely large inventory holdings of curing tobacco. The highratios fora number of branches of the metals industry also resultfrom relatively large inventory arising froma lengthy productionprocess, o, the other hand, the uniformly iowcurrent ratio among branches of mining and quarrying is due to the extremely small volumeof inventory and receivables in thoseindustries. To singleout the numerator rather than the denominator as the determinant ofa ratio may be misleading, but it is legitimate in the cases citedSince they differ much 4 more sharply in their current assets than intheir current liabilities. For the most part, however,variations in thecurrent ratio are not related to easily identified industrialcharacteristics, Significant industrial differences revealed byindividual working capital tend to become obscured when items the items are combinedwith other components, to form the current ratio; butsince we havenot found any singlegeneral explanation of industrial the individual variations in components of working capital, theabsence of "systematic" behavior inthe current ratiocannot be considered surprising. Despite the fact that a satisfactory general explanationof industrial variations inthe current ratiocannot be provided, several tests indicate thatthese variationsare not of a random character. On the basis of the frequencydistributions of the SEC data, significant differencesappear in the average of various branches current ratios of manufacturing. Acomparison of the rankings of income and deficit corporationsamong the minor industrial groups also reveals a moderate degree of stability inindustrial differences, although inthis respect thecurrent ratio is less stable than most of itscomponent items. Certain interesting results are obtained,however, when total current assets and totalcurrent liabilities are considered rately. First, the sepa- ratio ofcurrent assets to totalassets reveals no significant difference between produrirs'goods and consumers' goods lndustries,2 On the other hand,current assets are a much "VVha the minorindustrial groups and consumers' goods are classified according toproducer,' good, industrie,, theaverage current ratios for the 2.8 and 2.5, respectively;the slight difference two groups are statistical significance. between the average ratios isof no Tk. Current Ratio '9

Chart 8RATIO OF TOTAL CURRENT AssEm TO TOTAL CURRENT LIABIL- ITIES FOR INCOME AND DEFICIT GRouPs OF MINOR INDUSTRIAL DivisioNs, 1937*

Income Corporations Deficit Corporations lTo,.> (Tim..) 6 5 4 3 7 1 2 3 4 S

I I I I I I II Tobacco Silk and rayon Hardware Agricultural mchy. Office equipment Factory machinery Mill products Shoes Motor vehicles Precious metals Paper Teotiles, n.e.ct Metal bldg. materials tio are Miscellaneous machinery Locomotives, etc. ficant Fertilizers Knit goods Stone. clay, etc. itefl Household machinery Other rubber products other Bone, celluloid. etc. Carpets ye not Radios Musical instruments ons h Paints Tires and tubes Other leather products reef Allied chemicals (lectrical machinery dered Other wood products Woolens Cotton goods Other food Chemicals proper ost of Other mining Other metals de Clothing Packing house products dom Sugar rerining Canned products e SEC Retail trade Airplanes Sawmill products ratios Bakery products Anthracite erank- Petroleum Shipbuilding Soft drinks Iustthl Wholesale trade Metal mining Bituminous Printing and publishreg stable Whi. and ret. trade Liquors All other trade Oil and gas Other construction Construction Commission merchants ]sepa- Mining. n.e.c.t Iron and steel I I I I I Cats no I I j I 1 2 3 4 5 5 5 4 3 2 0 Based on data from Source Book ofSlalistic: of income for 1937. For composite zmucb of income and deficit corporations) seeData Book (National Bureau of Economic r? goods Research) Table C-28. lisp, are tNot elsewhere classified. Is of as S

70 Patter,, Fnsa,,cjal Strict,,,, higher proportion of sales in producers' goodsindustries (51 percent) than in consumers' goods industries (38percent). This reflects the fact that the producers' goods industriesare, on the average, larger and more vertically integrated, whichtends to increase the inventory/sales ratio. Second, no appreciable difference between thetwo classes of industries is evidenced by the currentliabilities/total assetsratio. However, the relatively higher proportionof currentassets to sales in the producers' goods branches, compared with theconsumers' goods industries, appears paralleled bya higher propor. tion of current liabilities to sales. Currentliabilitiesamount to 19 percent of sales in producers' goods industries, andto 13 percent in the consumers' goodsconcerns. The industrial rankings of the ratioof current assets bothto total assets and to sales are quite similar to the rankings ofthe ratio of current liabilities to assets and to sales.3 An industrythat requires relatively largecurrent assets tends to rely toa greater extent on short-term financing thanan industry requiring small current assets. If this were not thecase, the range of variation of the current ratio would beconsiderably greater than it is. Industrial differences in thecurrent ratio are only slightlyasso- ciated with differences in theaverage asset size of the minor industrial groups; the ratioshows a mild tendencyto rise as size of industry increases. Whencurrent assets and current liabilities are studied separately with respect to average asset sizeno consistent relationship appears. Current assets showan inverse relation in terms of total assets and a direct relation interms of sales, whereas current liabilities show a fairly strong inverserelation in terms of assets and a nonsignificant relation interms of sales. Industrial variations in thecurrent ratio, when relatedto the profitability of minor industrial divisions, reveala behavior op- posite to that of the components of the ratio. Themore profitable industries tend to haverelatively highcurrent ratios; but no tendency of this kind is evident when currentassets are considered separately. The more profitable industries displaya slight tendency toward having a low ratio ofcurrent liabilities to total 'See Appendix D forthe rank correlation based. coethciets on which this conclusion is lb. Curtl*t R.sio 7I assets, but theyshow no such tendency when the basis of com- parisOn is sales. $ e Variations with Corporate Size The current ratio risesfairly consistently as size of corporation increases in most of themajor manufacturing groups; but in some groupsnotably printing, chemicals,petroleumand also in construction and wholesale andretail trade the upward tendency is interrupted several times or isentirely absent. (Chart 9. See also Table C-24 in Data Book.) Inthe light of the variationsof the several working capital components as apercentage of sales, dis- 9 cussed in earlier chapters, thebehavior of the current ratio may t be traced to an increasein the relative importanceof current assets as size ofcorporation increases, accompanied by arelatively to steady level of current liabilities.Viewed in terms of ratios based ke upon total assets,the movements of the ratio maybe ascribed to than current at the fact that currentliabilities decline more sharply er assets as corporatesize increases.4 ill According to the SEC frequencydistributions for listed manu- of facturing corporations thedifferences between the averagevalues of the current ratio ofvarious size classes arestatistically signif- ratio icant. The SEC data alsoreveal the tendency for the current general movement or to increase with corporatesize, confirming the previous ze shown by the Internal Revenuedata. As noted in the es section, the influence of size onthe current ratio is not strong the rank enough to affect the industrialdifferences in this ratio, industrial la- correlation with the average assetsize of the minor statistical significance. es, groups being barelyabove the level of in Variations with Profitability and deficit The differences in the currentratio between income hc the level of this ratiois groups supportthe traditional view that )p- 8 and 9). Income cor- ble a symptom offinancial strength (Charts porations have a substantiallyhigher volume of current assets jd.. Examination of the separatefigures ed relative to current liabilities. chief decreases with corporatesize are registered rid- Among the current as,ets the in a consi,tently by receivables and cash. Inventoryvaries only moderately and not tal Marketable securities of incomecorporations in most direct or inverse manner. increases, while for deficit concernsthe move- industries rise as size of corporation nis snent is irregular.

3 72 Pastern oJ FinanciaL Structure

Chars 9RATIO OF TOTAL CURRENT ASSETS TO ToTAL CURRENT LIARIL. ITIES FOR INCOME AND DEFICIT GROUPS OF MAJOR INDUSTRIAL DivisioNs, 1937, BY ASSET SIZE*

INCOME CORPORATiONS DEIICIT CORPORATIONS

TIUCS AU. MFR. FOOD LIQUORS TOBACCO 4- 3 2

0 i1i1iU1 TEATILES CLOTH I HG LEATHER RUBOER

FOREST PRODUCTS PAPER PRiNTING CHEMICALS 4

PETROLEUM STONE. CLAY. ETC. METALS MOTOR VEHICLES

MINING CONSTRUCTION WHOLESALE TRADE RETA L TRADE

IiFIiEiI1 0 kIIiII1It1MI I 2340479910 I 23454 74915 I2 3 4 5 6 7 e 9 0

ASSET SIZE CLASOES IN 000U5A1905 O DOLLARS I: UNDER SO 4: .000 - 5000 2: 50-flU 7: 5000- 0000 300-250 6; 10000 50.000 & 250-500 9:20.000- IOO.00O 5; S00 1.000 0; 05.000 AND 0500

Based on Table C-24 in Data Book (National Bureauof Economic Research). Wholesale and retail trade figures are for theyear 1938. Tlse Current Ratio for total current assets andtotal current liabilities (each as a percentage of totalassets) reveals that this feature of the current ratio is the joint result of the behaviorof its numerator and denominator. The percentage figures for current assets aresub- stantially larger among income corporationsthan among corresponding deficit corporations, while the percentagesof current liabilities for income corporations aresystematically smaller. The association of a high current ratio with ahigh level of profitability is confirmed by the SEC data. In view of the marked relationshipbetween the current ratio and profitability it is of interest toinquire whether the variations of the ratio with corporate sizenoted above can be attributed to variations in profitability among the sizeclasses of the major industrial groups. Inspection reveals thatthis is not the case. The current ratio characteristicallyincreases with size among both income and deficit concerns, while theratio of net income to net worth is typically different in the two groups,rising sharply among the deficit group and remainingpractically stable for income corporations. INTERRELATIONSHIPS OF WORKINGCAPITAL ITEMS To what extent do the various workingcapital assets and liabilities follow a common or related patternwith respect to the three- fold classification by industry, size,and profitability? Thus far we have emphasizedthat the presence or absence ofrelationships In the static, cross-section picturethat we are studying does not necessarily indicate the presence or absenceof dynamic relationships between changes in one workingcapital item and changes in another. In the light of the dataalready presented we may expect that the nature of the interrelationships amongthe working capital items will depend to a large extent uponwhether sales or total assets are used as the basisof comparison.5 Accounts Receivable and AccountsPayable The extension of credit bycorporations is measured by the volume ). of notes and accounts receivable;and the receipt of credit from The analysis of interrelationships ofworking capital ratios with respect to industry is based on the computationof rank correlation coefficients between the selected ratios. These are given inAppendix D. Interrelationships with respect to size and profitability are judged by acomparison of the data given in preceding chapters. 74 Pattern of Piacjl Ssr,,g,1 other (nonfinancial) corporations is measured by thevolume of accounts payable. A comparison of the two balance-sheetitems will indicate the positions of certain classes ofcorporations, either as net creditors or as net debtors. A corporation whoseaccounts receivable exceed accounts payable (ignoring, for themoment, notes payable and other current liabilities) would, ineffect, be acting as a "bank" for the rest of the businesscommunity. The volume of receivables in the balance sheets of nonfinancialcorpo- rations totaled $15,700,000,000on or about December 31, 1937, while accounts payable totaled $12,100,000,000.The difference of $3,600,000,000measures the net extension of credit by incor- porated concerns both to other businesses arid, inthe case of retailers and of manufacturers' sales branches,to consumers.6 Among the minor industrial divisions thereis a definite tend. ency for a high turnover of accounts payableto be associated with a high turnover of receivablesand vice versa. in our earlier discussion of the turnover of thesetwo balance-sheet items (Chap. ters 3 and 4), we observed that both the ratioof receivables to sales and the ratio ofaccounts payable to sales are significantly higher in the producers' goodsthan in the consumers' goods industries. The formergroup of industries, with a longeraverage period of processing than theconsumers' goods industries,appar- ently utilizes a larger relativevolume of trade credit for working capital needs. On the other hand,they extend relativelymore trade credit, whichmay reflect the fact that the purchase of durable producers' goodsrequires relatively largesums for each individual transaction. Manufacturersselling consumers' goods directly to distributive Outletsapparently shift the burden of 'The volume ofaccounts receivable reported in balance sheets is relation to accounts payable by overstated in the amount of checks in the mailissued against current payable,, since current payable,are reduced without a corresponding reduc- tion in current receivables. This also produces an understatementof corporate cash holdings, since the balance sheets of the paying corporations showa reduced volume of cash holdings, while theaccount, of the receiving corporations credited with this amount. The volume are not yet of checks reported as inprocess of collection by member banks of the FederalReserve System as of December $2,300,000,000. 31,1937vas (Annual Reportofthe lioardofGotror,ofihe F'deraI Reserve System, 1937, p. 117.)In Debt: and Re!overy (1938),p. 335,Dr. A. G. Hart offers 75 percent as a "very rough"estimate of the proportion of to corporations. This would check, in the mails going amount to$1,700,000,000in1937and would reduce the difference betweenaccounts receivable and accounts payable $1,900,000,000. from $3,600,000,000 to I'ls. Currei1 Ratio financing these sales to the purchaser to a greaterextent than do sellers of producers' goods. Practically all the minor industrial divisions are netcreditors with respect to trade credit.In about half of the minor divisions, the volume of receivables istwice or more the volume of accounts payable. Only two groups (iron and steel,and metal mining) are net debtors, whilethree others (bakery products, canned products, and silk and rayon) show a veryslight margin of receivables over accounts payable. Theseobservations refer to income and deficit corporations combined or to incomecorporations separately; the deficit corporations, as would beexpected, include a number of ca of cases in which theminor divisions are net debtors with respect to era' trade credit. te ta Table 8 presents further aspects ofthe short-term creditor- debtor relationships ofnonfinancial corporations, with particular earlict reference to variations by size of concern.To simplify the analysis with respect to size, the ten sizeclasses discussed in earlier chapters have been reducedhere to four: small, medium-sized,large, candy and very large corporations.If notes payable, representing in- IIL debtedness primarily to banks, areadded to accounts payable, average nonfinancial corporations as awhole are substantial debtors on appa short-term account. This is notthe case, however, for certain working sectors of the corporatepopulation. For example, manufacturing lymore concerns in the income groupshown in Table 8 are net creditors; ' ase of and all nonfinancial corporationsin the income group have a ratio for each of receivables to notes and accountspayable of about 100 percent for the small and very large concerns,and of more than 100 per- rden of cent for themedium-sized and large corporations. Contrary to expectations theratio of receivables to accounts ntsted payable dues not rise progressivelywith size throughout the entire range. For allnonfinancial corporations with assets over $10,000,- ra 000 the ratio declines toapproximately the same level as that for behavior may be enotylt concerns with assetsof less than $250,000. This due at least partly to the factthat the balance sheets upon which 1937 W these ratios are based arein an unconsolidated form.The large gj Jjsflw selling subsidiaries (as in the at sfrs corporations often have very large ails gs4 petroleum industry) which have ontheir balance sheets a sub- reàcetle stantial volume of accountspayable to the parent company.This ,000,000 fact also may explain the dropthat occurs between the"large" 76 Pattern of Financial Structure I 7 able 8-CREDITOR-DEBTOR RELATIONSHIPS AMONG INCOME AND DEFICIT CORPORATIONS, 1937, BY ASSET SIZE" (dollar figures in millions) ------Rail0 ef Ratio of Rtezt'ab/,.j Notes and Receivab!es to No and Accounts Accounts Notes to 1.-counts jçgj.g5 pa Receivable Payable Payable Payable Payable cr (percent) (percent) as INCOME COItPORATIONS ra All Manufacturing in Small $473.0 $ 286.8 $ 171.5 165 103 Medium-sized 643.6 335.1 253.4 192 109 a Large 1,400.4 685.6 511 2 204 117 Very large 3,272.2 2,313.9 845.2 141 104 All Nonfinancial Small 1,7133 1,0759 634.9 159 100 Medium-sized 1,716.7 926.0 642.0 185 109 Large 3,003.6 1,722.91,101.8 174 106 Very large 5,664.9 4,242.81,378.8 134 101 DEFICIT CORPORKrIONS to All Manufacturing a Small 330.9 362.4 241.8 91 55 I Medium-sized 221.9 196.4 190.0 113 57 Large 3343 250.9 242.5 133 68 hi Very iarge 327.3 246.7 137.3 133 85 All Nonfinancial I Small 1,186.3 1,344.2 853.3 88 54 I Medium-sized 659.0 631.6 550.1 104 56 I S Large 827.4 850.9 764.8 97 51 p. Very large 919.5 1,317.9 727.8 70 45 0 INCOME Ptus DEFICIT All Manufacturing Small 803.9 649.2 413.3 124 76 m Medium-sized 865.5 531.5 443.4 163 89 Large to 1,734.7 936.5 753.7 185 103 Very large 3,5995 2,560.6 982.5 140 102 a' All Nonfinancial St Small 2,899.6 2,420.11.488.2 120 74 Medium-sized ti 1 2,315.7 1,557.61,192.1 153 86 Large 3,831.0 2,573.81,872.6 149 86 0 Very large 6,584.4 5,560.72,106.6 118 86 sa Based on data, as of December 31, 1937, fromStatistics of Income far 1937, Part 2, th and Source Book of Statistics of Income for 1937. b The asset-size classes (inclusive of the lower limit and exclusive of the upper)are as follows: Small: Less than $250,000 10 fr. Medium-sized:250,000-1,000,000 be Large: 1,000,000-io,000 000 Very large: 10,00000Q and over ab ar The Current Ratio 77 and the "very large"corporations, since the effect of increasing equally the numerator (receivables) andthe denominator (accounts payable) when aratio is greater than one is, of course, to decrease the ratio. The ratio of receivables to total assets andthe ratio of accounts payable to total assets both decline assize of corporation increases (seeChapters 3 and 4), with the accountspayable/total assets ratio showing the greaterdecrease. On the other hand, the ratio of receivables to sales tends torise slightly as corporate size increases, while the turnover of accountspayable varies irregularly 143 109.: and moderately from size class to sizeclass. Comparison of both b 117 types of ratioshows that as corporate size becomes largerthe P104 balance of receivables over accountspayable tends to increase 100 somewhat, although this movement isby no means uniform and '109 does not apply to all branchesof industry. 106 balance-sheet accounts with respect 101 The relationships of the two to profitability maybe considered in terms of their turnover among the incomeand deficit groups. The turnover ofreceivables 55 is slightly lower, and the turnoverof payables is considerably 57 68 higher, among income than amongdeficit concerns. ,85 Inventory and Notes Payable '54 inventorythe most important com- 56 Some relationship between 51 ponent of currentassetsand notes payablean important source :45 of current financingmight beexpected, but the data for the most part do not supportthis expectation. To be sure,those minor industrial divisions that have arelatively high ratio of inventory 76 moderate tendency to have a high percent- 89 to total assets show a relationship are 103 age of notespayable. The implications of this 102 strongly reduced, however, bythe fact that no such generalrela- compared upon the basis 14 tionship exists when the two accounts are 86 of sales. Individual casesof parallel variation of the inventory! 86 payable/sales ratio occur, but ingeneral 86 sales ratio and the notes the relationship is statisticallynonsignificant.7 , Part!, industries 'Illustrations of relationship are found,for example, in canned products ratios of inventory and notes payable tosales; and ,er) area' which have correspondingly highratios are correspondingly low. Such cases arenot in bakery products, in which the in frequent enough to constitute a generaltendency. Since the volume of inventory greater than the volume of notespayable, the both income and deficit groups is much payable absence of a systematic relationshipis to be expected, particularly since notes are an optional form of currentfinancing. S

7$ Patrerm of Fin,scLil Struet,..

There is little evidence of covariation between inventoryand notes payable with respect to differences in corporate size, Onthe basis of sales, inventory grows relatively larger as sizeincreases, while notes payable generally show no systematic variation.8When compared with total assets, inventory is generally largestamong the medium-sized corporations, while notes payable,on the whole, S decline as corporate size increases. For income and deficit corporations, inventory andnotes payable as a percentage of sales do not followa related pattern. The inventory/sales ratios are slightly higheramong income than among deficit corporations, while the notes payable/salesratios are appreciably higher among deficit than among incomecorpora.. tions. Absence of relationship is also found whentotal assetsare the basis of comparison. Diverse reasons for the variationamong industrial divisions of the turnover of inventory have been discussedin Chapter 2. The S degree of relationship between inventoryturnover and the turn- C over of notes payable will depend upon thereason for the high or g 0 low inventory turnover. Short-run changesin the volume of in. ventory, whether of a seasonal, cyclical,or random character, require short-term financing fromsuch sources as commercial banks. The degree of dependenceupon short-term credit as a source of funds may vary according to whether q the change in the ti volume of inventoryoccurs at an early phase of a revival, when t internal sources of fundsare limited, or at a later phase of re- S covery. When inventory is durableor when the seasonal and style factors are unimportant, working ci capital needs may bemet largely a from permanent funds derivedfrom non-current liabilities. The relationships between inventory and accounts payableare, cl on the whole, similar to those describedabove, since accountspay. able display a variation with industry, size, and profitabilitythat a parallels notes payable, withfew exceptions. In particular,accounts payable, like notes payable, financea much smaller propor- C tion of the inventories of large than of small manufacturingcorpo- I' rations. C 8 However, the two items, whencompared with sales, show similar one size class to another in the following variations from leather, forest products. groups: liquor, tobacco, textiles, clothing, 01 te Tis. Current Ratio .7,

4ccounts Payable and Notes Payable The relationship between the balance-sheet accounts which repre- sent trade credit and bank credit is ofparticular interest because it bears upon the question whether these two items tend tosub- stitute for one another in particular classes of corporations.The weight of the evidence points to the conclusion that notes and accounts payable are more complementary thancompetitive, both in their employment by, and in their availability to,corporations. It, Industries with a high proportion of notes payable do not generally have a low percentage of accounts payable, whether the basis of comparison is assets or sales. A few exceptions to this are found among industries purchasing raw materials in organized markets in which accounts payable are not available. With respect

' to size, both items when expressed as a percentageof sales show no systematic variation; when compared with total assets, they decline. Finally, both notes and accounts payable are substantially the tr 4 greater among deficit than among incomecorporations, regardless th of the basis of comparison. u of ii. Cash and Marketable Securities As in the case of notes and accounts payable, the most interesting question with respect to cash and marketable securities is whether angeiatfr they show a tendency to act as substitutes for each other.Among va!,wh the minor industrial divisions those corporations with arelatively ut of1e small volume of cash (as a percentage of total assets) show no aid consistent tendency to hold a relatively large volume of marketable securities, or vice versa. On the other hand, as corporatesize tieL increases the percentage of total assets in the form ofcash de- 'ay*bleare clines, while the proportion of marketable securities increases. When income and deficit corporations are compared, no system- blikytbit atic tendency toward substitution is observed. cuhr, ac. Cash and Note.s Payable 11crpreCf Nonfinancial corporations as a whole are neither net debtors nor I ngcecp1 creditors of the banks, when the ratio of cash to notespayable is used as a measure. The corporations' cash holdingsof $6,700,- 000,000 at the end of 1937 just equaled theiroutstanding short- term obligations in the formof notes payable. Manufacturing so Pattern of Financial Structure corporations as a group were net creditors to a slight degree, the ratio of cash to notes payable being 127 percent. Trade Corpora. tions, on the other hand, were net debtors, with a ratio of 77 percent. Among the sixty-one minor divisions, thirty-six were net creditors. The median value of the ratio among the minor indus. trial divisions was 117 percent, with the first quartile at 76per. cent and the third quartile at 161 percent. (See Table C-28 in Data Book.) The ratio of cash to notes payable tends to increase withcor- porate size, although not in a very consistent fashion. Both cash and notes payable (as a percentage of total assets) dcclineas corporate size increases, and the upward movement in the cash,' notes payable ratio may result from the sharper decline in the notes payable item. Small and medium-sized corporations, with assets under $1,000,000, tend to be net debtors to the banks, while among the larger concerns the volume of cash typically exceeds the notes payable outstanding by substantial margins. A comparison of the ratios for the income and deficitgroups a reveals, as might be expected, that the income corporationsare net creditors of the banks while the deficit corporations are net debtors. The difference between the levels of the ratios is large. For nonfinancial corporations as a whole the ratio for the income group is 146 percent; and that for the deficit group, 40 percent. For all manufacturing corporations the ratiosare 166 and 41 percent for income and deficit corporations, respectively. The ratios for income and deficit corporations of certain industries are in fact the reverse of those for the group as a whole. However, it may be stated that roughly 70percent of the assets and 72 per. cent of the sales of all nonfinancial corporationsare represented by corporations which are to some extent net creditors of thebanks.