Current Ratio Wednesday, June 27, 2007
Posted by ei-forum in Understanding Ratios.trackback
The Current Ratio is calculated by dividing Current Assets by Current Liabilities.
This ratio show us how well a company is able to pay off its short-term debt using its most liquid assets over the next 12 months (short-term solvency).
A ratio of “1″ would mean that the company can pay off its short-term debt. Higher than “1″ would mean that it still has cash left over to operate and under “1″ would mean that it cannot pay off its short-term debt.
As a Value Investor, you will be looking for a ratio higher than 1 and ideally around 1.5. Please note that if the current ratio is too high, then the company may not be efficiently using its current assets.
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[...] Current Ratio equal to or over 1: in order to ensure the immediate financial health and ability to meet current obligations [...]
Some good information, but I feel that a 1.5 ratio is the minimum I feel comfortable with.
we agree that 1,5 is the number but make sure it is not too high!
….Please note that if the current ratio is too high….
what number is too high? is a 3.3 current ratio with a quick ratio of 2.2 too high?
In a normal economic environment, we would me more worried about the high current ratio, 3.3 is really high.
If the current ratio is too high, then the company may not be efficiently using its current assets… a waste…. but maybe they are just hording cash due to the current economic situation!
On the other hand, since the the quick ratio is a measure of how well a company can meet its short-term financial liabilities, the higher the ratio, the more liquid assets the company has to cover immediate obligations.