Analysis of Current Ratio

The measure of the liquidity of a firm over a certain date or for a certain period of time is called current ratio. The maintenance of current ratio is very important for a company as it shows the ability of a company to pay of its short term obligations. Generally most of the firms try to keep current ratio at 1 in order to ensure the creditors that their assets can cover their short term obligations. The value 1 of current ratio is safe however if it is above 1 it will provide an extra cushion to the company in paying the sudden obligations and liabilities that may arise in near future.

While calculating and determining the value of current a business must define the sources of capital and their capital requirement as compared to the set of liabilities they need to fulfill in near future. A very high value of the current ratio shows that more of the working capital is maintained and resources are bind up in working capital instead of using them in some profitable scenario. So the companies having high current ratio must imply their resources in some other profitable business rather accumulating them in working capital. A low value of current ratio shows that a company may not implied its resources adequately in working capital and is unable to fulfill the future risks and obligations.

Current ratio must be analyzed by the financial experts of the company from time to time. A low value of current ratio suggests the liquidity of the firm has might increased or it may indicate a conservative approach in handling the working capital.

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