![\"Current](\"http:\/\/www.officetodo.com\/public\/wp-content\/uploads\/2011\/12\/pic_current_ratio.png\")
\u2018Current ratio\u2019 is used to measure company\u2019s liquidity. As you know, liquidity means the ability to pay up debt and obligations taken. The higher the liquidity, the more resources a company has to satisfy its creditors. Liquidity is achieved by having cash and cash equivalents, accounts receivable and inventory at least at stabile levels. The higher those levels, the more liquid a company may be deemed. <\/p>\n
Company\u2019s liquidity is therefore measured using a simple formula \u2013 current assets are divided by current liabilities. Current assets are the resources, which are used to satisfy all current liabilities due in less than 12 months. As current assets are also meant to be collected and turned into tradable resources (i.e. cash) in less than 12 months, those two enable us to evaluate the company\u2019s ability to continue as a going concern using its current business course and finances.
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This ratio shows whether the company has enough liquid assets to cover for its short-term liabilities. Obviously, when the result is under 1, it indicates that the company may suffer difficulties when the due dates arrive for the debt balances. We say \u2018may\u2019 because it does not necessarily mean bankrupt or serious financial difficulties, however if the company fails to get this situation under control with other means of financing or business decisions, this is an indication of imminent financial problems.<\/p>\n
As such the current ratio is also giving a good overview of the efficiency the company is run with, however, what must be always noticed, is the industry a company is in. One must compare ratios with companies in similar industries as every sector has unique characteristics when it comes to financial ratios. <\/p>\n","protected":false},"excerpt":{"rendered":"
\u2018Current ratio\u2019 is used to measure company\u2019s liquidity. As you know, liquidity means the ability to pay up debt and obligations taken. The higher the liquidity, the more resources a company has to satisfy its creditors. Liquidity is achieved by having cash and cash equivalents, accounts receivable and inventory at least at stabile levels. The […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[28,47],"tags":[],"class_list":["post-2129","post","type-post","status-publish","format-standard","hentry","category-4-reporting","category-4-2-financial-ratios"],"aioseo_notices":[],"aioseo_head":"\n\t\t\n\t\n\t\n\t\n\t\n\t\n\t\t