Lesson 4 of 8
Two different failures
One company covers interest 3.3 times with a current ratio of 0.32. Another has a current ratio of 2.11 and covers no interest at all.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- A liquidity problem is not having the cash this month. A solvency problem is not being worth enough to cover the claims at all.
- A current ratio of 0.32 can be a business model rather than a warning, and a current ratio of 2.11 can sit beside an operating loss.
- The two failures are read from different places: liquidity from the facilities and the maturity schedule, solvency from earnings against claims.
Companies fail in two different ways and the ratios that are supposed to catch them are routinely read as one thing.
Two companies, two opposite readings
- Carnival, current ratio0.32x
- Carnival, interest coverage3.32x
- SunCoke, current ratio2.11x
- SunCoke, interest coverage−1.35x
The company whose liquidity ratio looks alarming
Carnival's current assets are 4,219 million against current liabilities of 13,092 million: a current ratio of 0.32, far below the level any textbook calls comfortable.
Read the liability side and the ratio changes meaning. Customer deposits of 6,831 million are 52 percent of those current liabilities, and they are not a debt to be repaid in cash. They are an obligation to deliver cruises, settled by operating the ships that are already on the balance sheet at 43.5 billion.
Meanwhile the same filing shows operating profit covering interest 3.3 times, cash of 1,928 million, and an undrawn revolving facility of 4,500 million against a covenant requiring 1,500 million of liquidity. This is a business that collects cash before it delivers the service, and a current ratio treats that as a deficit.
The company whose liquidity ratio looks fine
SunCoke's current ratio is 2.11, which passes every standard screen. Its operating income for the same year is minus 44.4 million against interest expense of 32.9 million, so interest coverage is minus 1.35 times.
That is the other failure. Nothing is due this month that cannot be paid; the business simply did not earn enough to service its capital, and a year like that repeated is a solvency problem however liquid the balance sheet looks.
Where each failure is actually read
| Question | Read |
|---|---|
| Can it pay this month | Cash, undrawn committed facilities, the next twelve months of maturities, and what the working capital cycle releases |
| Can it pay at all | Operating profit against interest, the distress score, and whether the asset value covers the claims |
Neither is a single ratio. The first is a schedule and the second is a trajectory.
Read that way the next year is covered several times over, which is a different statement from anything the current ratio said.
Where they meet
The two failures are connected by the covenant. A company with a solvency problem usually meets it first as a liquidity event: a test fails, the facility stops being available, and the money that was going to refinance next year's maturity is no longer there.
That is why the maturity schedule and the covenant schedule are read together. The question is not whether a company is solvent today but whether it will still have access to money on the date it needs to refinance.
Check yourself
Why is a current ratio of 0.32 not necessarily a liquidity problem?
- Because current ratios are unreliable
- Because more than half of these current liabilities are customer deposits, settled by delivering a service rather than by paying cash
- Because the company has no short-term debt
Show the answer
Answer: B.
A business that collects before it delivers carries a large deferred revenue balance, and the current ratio counts it as if it were a cash obligation.A company has a current ratio of 2.11 and interest coverage of minus 1.35. Which problem does it have?
- A liquidity problem
- A solvency problem: it is liquid now but did not earn enough to service its capital
- Neither, since the current ratio is comfortable
Show the answer
Answer: B.
Nothing is due that cannot be paid. What is missing is the earnings, and a liquidity ratio cannot see that.How does a solvency problem usually first appear?
- As a missed interest payment
- As a covenant test failed on a date, which removes access to the money that was going to refinance a maturity
- As a credit rating downgrade
Show the answer
Answer: B.
Acceleration and lost availability arrive before a payment is actually missed, which is why the covenant and maturity schedules are read together.Sources
- Carnival Corporation and plc, Form 10-K, fiscal year ended 30 November 2025, filed 2026-01-27: balance sheet, customer deposits, the revolving facility, the covenant minimum liquidity and the maturity schedule.
- SunCoke Energy, Form 10-K, fiscal year ended 31 December 2025, filed 2026-02-20: operating income, interest expense and the balance sheet behind its current ratio.
- Altman, Journal of Finance, 1968: the distress score used as the solvency reading here.
What this leaves out
- Both companies are shown on one filed year. A single year is a snapshot of a trajectory, and neither reading is a forecast.
- Interest coverage here is operating income over interest expense, which is the product's own definition and a more conservative one than an EBITDA-based covenant test.
- Undrawn facilities are available subject to conditions in the agreement, including the covenants, which is exactly when availability disappears.
- Nothing here is advice about any security.