current ratio

Examples of current ratio in the following topics:

• Current Ratio

  • The current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months.
  • The current ratio is calculated by taking total current assets and dividing by total current liabilities.
  • If current liabilities exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term obligations (current liabilities).
  • This can allow a firm to operate with a low current ratio.
  • The current ratio can be use to evaluate a company's liquidity.

• Acid Test Ratio

  • The acid-test, or quick ratio, measures the ability of a company to use its near cash or quick assets to pay off its current liabilities.
  • The acid-test ratio, also known as the quick ratio, measures the ability of a company to use its near cash or quick assets to immediately extinguish or retire its current liabilities.
  • In general, the higher the ratio is, the greater the company's liquidity (i.e., the better able to meet current obligations using liquid assets).
  • A company with a quick ratio of less than 1 cannot currently pay back its short-term liabilities.
  • The acid-test ratio is similar to the current ratio except the value of inventory is omitted from the calculation.

• Adjusting for LIFO Reserve

  • When dealing with valuing a company using ratios, one must also convert all numbers to FIFO method for easy comparison.
  • This means that, for example, when calculating the current ratio, the LIFO reserve should be added back into the numerator of the equation.

• Return on Assets

  • The Return on Total Assets ratio measures how effectively a company uses its assets to generate its net income.
  • The Return on Total Assets ratio is similar to the Asset Turnover Ratio in that both measure how effective a business's assets are in generating returns for the business.
  • But while the asset turnover ratio is focused on the business's sales, return on assets is focused on net income.
  • The greater the value of the ratio, the better a company is performing.
  • This is generally done by comparing the current return on assets ratio to the company's past performance or to a competitor's ratio.

• Debt-to-Equity Ratio

  • The Debt-to-Equity Ratio is a financial ratio that compares the debt of a company to its equity and is closely related to leveraging.
  • The Debt-to-Equity Ratio is a financial ratio indicating the relative proportion of shareholder's equity and debt used to finance a company's assets, and is calculated as total debt / total equity.
  • Calculating a company's debt to equity ratio is straight forward, and the debt and equity components can be found on a company's respective balance sheet.
  • When used to calculate a company's financial leverage , the debt-to-equity ratio includes only long-term liabilities in the numerator and can even go a step further to exclude the current portion of the long-term liabilities.
  • This means that other short-term liabilities, such as accounts payable, are excluded when calculating the debt-to-equity ratio.

• Income Statement Analyses

  • Price to Earnings Ratio = Market Value of Stock / Earnings per Share
  • A higher P/E ratio means that investors are paying more for each unit of current net income, so the stock is more "expensive" than one with a lower P/E ratio.
  • The P/E ratio can be regarded as being expressed in years.
  • In railroading, an operating ratio of 80 or lower is considered desirable.
  • The ratio does not factor in expansion or debt repayment.

• Gross Profit Method

  • Inventories are usually the largest current asset of a business, and proper measurement of them is necessary to assure accurate financial statements.
  • Determine the gross profit ratio.
  • Gross profit ratio equals gross profit divided by sales.
  • Use projected gross profit ratio or historical gross profit ratio whichever is more accurate and reliable.
  • Multiply sales made during the period by gross profit ratio to obtain estimated cost of goods sold.

• Using the Receivables Turnover Ratio

  • The receivables turnover ratio measures how efficiently a firm uses its assets.
  • The receivables turnover ratio, also called the debtor's turnover ratio, is an accounting measure used to measure how effective a company is in extending credit as well as collecting debts.
  • The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets.
  • A high ratio implies either that a company operates on a cash basis or that its extension of credit and collection of accounts receivable is efficient; in contrast, a low ratio implies the company is not making the timely collection of credit.
  • Sometimes the receivables turnover ratio is expressed as the "days' sales in receivables":

• The LIFO Reserve

  • The change in the balance during the current year represents the current year's inflation in costs.
  • The change in the balance in the LIFO reserve will also increase the current year's cost of goods sold.
  • The change in the balance of the LIFO reserve during the current year times the income tax rate results in the difference in the income tax for the year.
  • The disclosure of the LIFO reserve is better for comparing the profits and ratios of a company using LIFO with the profits and ratios of a company using FIFO.

• Efficiency Metrics

  • Efficiency ratios for inventory measure how effectively a business uses its inventory resources.
  • An efficiency metric or ratio, sometimes referred to as an activity ratio, is a type of financial ratio.
  • Ratios can be expressed as a decimal value, such as 0.10, or given as an equivalent percent value, such as 10%.
  • Some ratios are usually quoted as percentages, especially ratios that are usually or always less than 1, while others are usually quoted as decimal numbers, especially ratios that are usually more than 1.
  • The inventory turnover ratio is a measure of the number of times inventory is sold or used in a time period, such as a year.