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Calculate the current ratio of Seabold Company when:
Calculate the current ratio of Jennings Corporation when:
Current liabilities =
The current ratio takes a broader view than the cash ratio. Like cash ratios, the current ratio looks at a company’s ability to pay off debts in 12 months. However, current ratios use the value of all company assets available in 12 months. Some of these assets—such as inventory—might not be easily converted to cash. But, they are still available to business owners.
Factoring and other asset-based financing enables business owners to convert these assets into ready cash or working capital. The current ratio gives businesses a clearer look into how much of their assets might be converted into cash without creating difficulties in paying short-term liabilities.
Acceptable current ratio values vary a lot from industry to industry. Generally, ratios between 1.5 and 3 indicate healthy businesses. If current liabilities exceed current assets (the current ratio value is below 1.0), then the company might have problems paying its short-term bills. Low values, however, don’t always indicate a critical problem. If an organization has good long-term prospects, it may be able to borrow against those prospects to meet current obligations. Some types of businesses usually operate with a current ratio less than one.
It’s also useful to also look at current ratio trends. If the trend of this ratio is upward, the business is doing well financially. If not, there might be a problem that needs to be addressed.