The Current Ratio – What Does Your Financial Statement Actually Say??

The Current Ratio – What Does Your Financial Statement Actually Say??

Be Sociable, Share! TweetIn this series we will look at the various financial ratios used by bankers, buyers, and investors to evaluate the fiscal health of your company. While there are a great many ratios in common use, we are going to examine the most important and commonly used in financial analysis. The Current Ratio The current ratio is the ratio of current assets to current liabilities on your balance sheet. This is a critical ratio because it demonstrates whether the company is likely to be able to weather short term adversity without significant hardship. The current assets are all assets held by the company that can be converted to cash within one year. Typically this included cash, investments, inventory, and current accounts receivables. Even though some other assets may be sold or liquidated within a year, such as a building, there is no guarantee that liquidation would always happen within 12 months. Those assets are not counted as current assets. Current liabilities are those items that the company has to pay within one year. They are normally accounts payable and current portion of long term debt. It is expected that any fiscally healthy company will have enough current assets, that when converted to cash, are sufficient to pay off all the current liabilities in full. Therefore a company that has current assets of $500,000 and current liabilities of $500,000 would have a current ratio of 1, or 1/1. If, in this example, the current liabilities were $250,000 instead of $500,000, the current ratio would be 500,000/250,000 = 2, or 2/1.   Large, well established companies often have very high current...
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