Financial Analysis - Ratios - liquidity Ratio - current ratio
current assets/current liabilities
formula for current ratio
compares current assets to current liabilities
what does current ratio compare
to much capital held up in stock
what does it mean assets very high
business doesn't have enough working capital & cant use assets to pay for things when need them
what does it mean if a business has poor liquidity
business dont have enough current assets pay liabilities when due they either have to quickly find money to pay them or give up & stop trading or go into liquidation
what does it mean if business insolvent
falling short of ideal ratio 2:1
what does it mean if ratio <1
shows how solvent business is (how able pay debts)
what does liquidity ratio show
how easily can be turned into cash& used buy things cash very liquid non current assets ie factories not liquid stocks (inventories)& money owed by debtors (receivables are between the two
what is liquidity of an asset
double assets to liabilities 2:1
whats ideal ratio
decrease stocks levels, speed up collection of debts owed to business or slow down payments to creditors (suppliers)
how can liquidity be improved