Current ratio

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Current Ratio

Explanation of Current Ratio:

  • What this ratio basically tells us is if the company had to sell all its readily available assets, would it be able to pay off its immediate debt?

Importance of Current Ratio:

  • At a minimum, you would hope the company whose financial performance you are analysing could meet pay its current liabilities if it were to liquidate all its current assets.  

    This would translate to a Current Ratio of 1.0.

  • As with all the other performance ratios, the Current Ratio value depends on the industry in which the company is operating.  

    It is also important to know what assets make up most of the Current Assets.  

    Inventory and Accounts Receivable, which are part of the Current Assets, cannot always be counted on as easily transferred to cash.

  • Cash and Marketable Securities comprising the majority of the Current Assets would definitely be favorable. 

    Knowing this, would the company you are analysing truly be able to meet its financial obligations if it in fact had to sell its current assets?  

    The Current Ratio rising over time will be favorable.

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