Are your business assets like a mountain spring or engine sludge?
We’ve already looked at operating, or asset management ratios. Liquidity ratios are another important set of financial indicators. Every company needs the ability to pay bills as they become due. A company that does not have enough liquid assets to pay current liabilities will quickly find financial trouble. Suppliers will demand quicker payment and deny credit which is company lifeblood.
- The current ratio indicator shows how many times the company can cover or pay the bills that are coming due within the next year. Current assets such as cash, short-term investments and sometimes inventory are quickly converted to cash for bill payment. Generally, current liabilities are those due within the next twelve months.
- The quick ratio only looks at assets that are cash or nearly cash and how many times that amount can cover bills that are immediately due.
Keep these ratios at greater than one-to-one or you may soon find yourself unable to pay your bills.
- Fundamental Analysis: A Quick Start Guide (tradeking.com)
- What are the specific kinds of assets (wiki.answers.com)
- Explaining Fixed Assets to Net Worth Ratio (brighthub.com)
- The Balance Sheet (egrejeen.wordpress.com)