Current Ratio

What are liquidity ratios?

Assess whether a business has sufficient cash or equivalent current assets to be able to pay its debts as they fall due

What are examples of financial statements?

• Income Statements

• Statement of Financial Position (Balance Sheet)

• Cash Flow Statement

What is an income statement?

Measures business performance over a given period of time, usually one year. It compares the income of the business against the cost of goods or services and expenses incurred in earning that revenue

What is a balance sheet?

A snapshot of the business’ assets (what it owns or is owed) and its liabilities (what it owes) on a particular day

What is a cash flow statement?

This shows how the business has generated and disposed of cash and liquid funds during the period under review

What is the liquidity equation?

Current Assets/ Current Liabilities

What is the evaluation of current ratio?

• A ratio of 1.5-2.5 would suggest acceptable liquidity and efficient management of working capital

• A low ratio (e.g. well below 1) indicates possible liquidity problems

• High ratio: too much working capital tied up in inventories or debtors?

What is a top grade evaluation?

• The industry or market matters

  • Firms have different requirements for holding inventories or approaches to trade competitors.

  • How does the current ratio compare with competitors?

• The trend is more important

  • A sudden deterioration in the current ratio is a good indicator of liquidity problems

What are examples of current assets?

1. Cash

2. Stock Inventory

3. Accounts Receivables (Invoices)

What is the max of assets to liabilities?

Twice the assets than liabilities

What is the min of assets to liabilities?

1 asset to .5 liabilities