In this example, although both companies seem similar, Company B is likely in a more liquid and solvent position. An investor can dig deeper into the details of a current ratio comparison by evaluating other liquidity ratios that are more narrowly focused than the current ratio. For example, in one industry, it may be more typical to extend credit to clients for 90 days or longer, while in another industry, short-term collections are more critical. Ironically, the industry that extends more credit actually may have a superficially stronger current ratio because its current assets would be higher. It is usually more useful to compare companies within the same industry.<\/p>\n
When you calculate a company’s current ratio, the resulting number determines whether it’s a good investment. A company with a current ratio of less than 1 has insufficient capital to meet its short-term debts because it has a larger proportion of liabilities relative to the value of its current assets. The current assets are not entirely funded or financed by the own resources of the company. The current ratio is the proportion, quotient, or relationship between the amount of a company’s current assets and the amount of its current liabilities. The current ratio is calculated by dividing the amount of current assets by the amount of current liabilities.<\/p>\n
Adopting the above-mentioned approach would provide you a better idea about the short-term liquidity of the company. Besides, you should analyze the stock’s Sortino ratio and verify if it has an acceptable risk\/reward profile. As it is significantly lower than the desirable level of 1.0 (see the paragraph What is a good current ratio?), it is unlikely that Mama’s Burger will get the loan. Let\u2019s look at a hypothetical current ratio example to demonstrate how the current ratio works. A value below 1 may indicate that a firm lacks adequate liquidity and might face difficulty paying off its short-term debt.<\/p>\n
The current ratio is a crucial metric for e-commerce businesses, as it provides valuable insight into the company’s ability to meet its short-term liabilities. A high current ratio is generally a positive indicator of financial stability, although a current ratio that\u2019s too high, can indicate you\u2019re not maximising the use of your assets to grow. As an e-commerce business owner, it\u2019s important to understand the current ratio and keep it at a healthy level to enable financial stability and attract investors and lenders. For example, if a company has a current ratio of 1.5\u2014meaning its current assets exceed its current liabilities by 50%\u2014it is in a relatively good position to pay off short-term debt obligations. The above analysis reveals that the two companies might actually have different liquidity positions even if both have the same current ratio number. While determining a company\u2019s real short-term debt paying ability, an analyst should therefore not only focus on the current ratio figure but also consider the composition of current assets.<\/p>\n
For many businesses, this could mean raising funds through an equity raise. Current ratio is a number which simply tells us the quantity of current assets a business holds in relation to the quantity of current liabilities it is obliged to pay in near future. Since it reveals nothing in respect of the assets\u2019 quality, it is often regarded as crued ratio. It is important to note that a similar ratio, the quick ratio, also compares a company\u2019s liquid assets to current liabilities. However, the quick ratio excludes prepaid expenses and inventory from the assets category because these can\u2019t be liquified as easily as cash or stocks.<\/p>\n