When a current ratio is low and current liabilities exceed current assets the current ratio is below 1 then the company may have problems meeting its short-term obligations current liabilities. Lack of short term investment opportunities. It indicates whether the business can pay debts due within one year out of the current assets. If Current Assets Current Liabilities then Ratio is greater than 10 - a desirable situation to be in. Typically we take a period of less than a year. As a bankers rule of thumb the standard for current ratio is 21. Reasons of Low Current Ratio. A very high current ratio may indicate existence of idle or underutilized resources in the company. The amounts collected from debtors is not satisfactory. In the same vein as the current ratio the debt to equity is a good measure of financial strength that can be useful when looking for stable investments.
Current ratio is also affected by seasonality. Investors typically look for a current ratio greater than 1 150 or even 2. This is because most of the current assets earn low or no return as compared to long-term assets which are much more productive. The higher the current ratio is the more capable the company is to pay its obligations. A high current ratio is not necessarily good and a low current ratio is not inherently bad. Thus a company with a current ratio of 25X is considered to be more liquid than a company with a current ratio of 15X. This means that the assets and the liabilities are supposed to be met in the short run. For example in the retail industry a store might stock up on merchandise. Generally a business with a current ratio under 1 is considered bad. A relatively high current ratio is an indication that the firm is liquid and has the ability to pay its current obligations in time as and when they become due.
Current ratio is computed by dividing total current assets by total current liabilities of the business. Reasons of High Current Ratio. Theoretically a high current ratio is a sign that the company is sufficiently liquid and can easily pay off its current liabilities using its current assets. A higher current ratio indicates strong solvency position and is therefore considered better. A relatively high current ratio is an indication that the firm is liquid and has the ability to pay its current obligations in time as and when they become due. Debt To Equity. The current ratio is the classic measure of liquidity. A high current ratio indicates that a company is able to meet its short-term obligations. This means that the assets and the liabilities are supposed to be met in the short run. A current ratio of less than 1 could be an indicator the company will be unable to pay its current liabilities.
The current ratio is calculated by dividing a companys current assets by its current liabilities. A current ratio of less than 1 could be an indicator the company will be unable to pay its current liabilities. Increases in the current ratio over time may indicate a company is growing into its capacity while a decreasing ratio may indicate the opposite. This is because most of the current assets earn low or no return as compared to long-term assets which are much more productive. A high current ratio indicates that a company is able to meet its short-term obligations. If current ratio is bellow 1 current liabilities exceed current assets then the company may have problems paying its bills on time. It indicates whether the business can pay debts due within one year out of the current assets. The higher the current ratio is the more capable the company is to pay its obligations. Quick assets cash and cash equivalents marketable securities and short-term receivables are current assets that can be converted very easily into cash. This relationship can be expressed in the form of following formula or equation.
The current ratio reveals how much cover the business has for every 1 that is owed by the firm. In the example above the quick ratio of 119 shows that GHI Company has enough current assets to cover its current liabilities. Interpretation of Current Ratio. Theoretically a high current ratio is a sign that the company is sufficiently liquid and can easily pay off its current liabilities using its current assets. Since the current ratio includes inventory it will be high for companies that are heavily involved in selling inventory. This relationship can be expressed in the form of following formula or equation. Reasons of Low Current Ratio. For example in the retail industry a store might stock up on merchandise. This is because most of the current assets earn low or no return as compared to long-term assets which are much more productive. It indicates poor sale.
