Current ratio or working capital ratio, Financial Econometrics

Assignment Help:

Current ratio (CA) or working capital ratio

CA = Current assets/Current liabilities (times)

Current ratio measures the short term solvency or liquidity; it signifies the extent to which the claims of short-term creditors are covered by assets. Current ratio is basically looking at the working capital of the company. Effective management of working capital ensures that organisation is running efficiently. This will ultimately result in increased profitability and positive cash flows. Effective management of working capital involves low investment in non-productive assets such as trade receivables, inventory and current account bank balances. Also maximum use of free credit facilities such as trade payables ensures efficient management of working capital.

Normal current ratio is around 2:1 however this varies within different industries. Low current ratio may indicate insolvency. High ratio may indicate not maximising return on working capital. Valuation of inventories would have an impact on the current ratio, as will year end balances and seasonal fluctuations.

The use of ratios

  • To compare results over a period of time
  • To measure performance against other organisations
  • To compare results with a target
  • To compare against industry averages

We will now look at some of the working ratios in detail and illustrate how they can be interpreted.


Related Discussions:- Current ratio or working capital ratio

Calculate the standard deviation, You are required to conduct a stock marke...

You are required to conduct a stock market simulation for a period of  four weeks (week 4 - week 7). This is a group project which may consist of five members only. Each group will

Evaluate the feasibility of project, Question 1 : Assuming that you ar...

Question 1 : Assuming that you are appointed as a consultant to assess the Tertiary education sector in Mauritius in order to do a due diligence on the potential f

Conservative policy for financing working capital, Q. Conservative policy f...

Q. Conservative policy for financing working capital? A conservative policy for financing working capital is one where short-term finance is usedto fund: A : All of the flu

Options, Four European vanilla Call options ()iC· on an underlier with no i...

Four European vanilla Call options ()iC· on an underlier with no interim cash flows, have identical maturity T. Their strike prices iK are such that 1234KKKK A trader buys ()1CK an

Aggressive working capital policy, All the non-current assets and part of p...

All the non-current assets and part of permanent assets financed by long term. Remaining permanent assets all temporary fluctuating assets by short term. £65m long term debt and eq

Explain the theoretical impact on the risk discount rate, Question : A ...

Question : A proprietary life company issues only non-profit guaranteed growth bonds. The company invests only in equities with an expected return of 10% p.a, the risk free rat

What do you meant by equilibrium national income, Question 1: a) What ...

Question 1: a) What do you meant by equilibrium National Income and to what extent is economic growth beneficial to an economy? b) Explain using both diagrams and mathemat

Calculate correlation coefficient, Question The variance of Stock A is ...

Question The variance of Stock A is .004, the variance of the market is .007 and the covariance between the two is .0026. What is the correlation coefficient?

Operating cycle, what is the applicability of an operating cycle in vegetab...

what is the applicability of an operating cycle in vegetable growing?

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd