Understanding Liquidity: The Current Ratio Explained

1490 Words3 Pages

1.Liquidity Analysis
1.1 Current Ratio
Definition:
The current ratio is a financial ratio that measures whether a firm has enough resources to pay its debts over the next 12 months. It compares a firm's current assets to its current liabilities. In other words, it shows how much that a company must pay it 1 rupee of liability.
Theoretical Concept: The current ratio gives a fare view to investors and creditors to understand the liquidity of a company how quickly a company is meets its short-term obligations to converted assets into cash. Let spouse if a company has current ratio is two it means a company has two rupees to pay its one rupee current liabilities. A higher current is more beneficial for a company as compare to lower ratio. The current ratio according to standard benchmark 1-2 is acceptable. The company has the current ratio equal or above 2 is much better performing it means that the company have 2 rupees to pay its 1 rupees of liability and still have 1 rupee to use for its day to day operations. …show more content…

There is not a big difference between the current and quick ratio so we can say that company is not dependent on the sale of its inventory as the termination of inventory head from the ratio there is no such big clauses. Figure 1.2 shows that company quick ratio fluctuate during last three years but low from bench mark of quick ratio. In 2013 quick ratio of company is 0.46 and 2014 is 0.31 and 2015 it is 0.34. According to the industry average we can see that the company is fall below the industry average. But industry average also fluctuates. The investor will not do a good investment but on the other hand we see raw material provides by the company has high inventory dependence it means they are buying more from him but not a good view from clients as they are sale on the credit basis that they must