What is the current ratio?

The current ratio is a simple but effective tool that is often used to get a precise image of the company's financial stability. The calculation of the current ratio essentially requires only access to two accurate information - the total sum of the current obligations of held companies, as well as the value of current assets. By comparing these two numbers and achieving the current ratio for the company, it is possible to plan future operations and determine ways to improve the overall state of business.

One of the most important facts that the current ratio reveals is the current status of the company in honor of short -term debt obligations. A company that is in a good financial situation will generally have a high asset ratio to obligations. This means that the company does not assume any problems with being able to honor the short -term debt that could be obtained to strengthen a certain part of the production process or replace the Equipment.

Sometimes it is referred to as the ratio of working capital, the simple formula of the division of liabilities according to assets can also make it possible to realize a situation where society is not as safe as it should be. Although the company may actually fulfill its obligations in time, the lower current ratio suggests that net profits are low and that some changes are in order if the company wants to remain a solvent in the long term. Thus, the low current ratio may be a challenge for awakening to initiate refinement of the use of available resources, improve the efficiency of general traffic, and possibly eliminate the restructuring of some departments, so the necessary tasks are performed with lower costs.

Companies tend to regularly use the current ratio. In more volatile industries, corporations may decide to calculate the current ratio of every billing period or at least every Calendar Quarter. For companies dealing with a relatively stable industry, mohOU find out that the semi -annual current ratio works well. Of course, the current ratio can be calculated at any time if a specific date for evaluating the status of assets and liabilities is identified.