Question

What does current ratio or amount of working capital tell us? What do we expect to happen to current assets and current liabilities?

Answer 1

Current ratio is a ratio of current assets to current liabilities and working capital is the difference between current assets and current liabilities. These two measures of financial analysis are widely used in evaluating the short-term debt-paying ability of a company. A declining current ratio indicates deteriorating financial condition and improving ratio indicates improving financial condition. A higher amount of working capital provides an assurance to the creditors that they are paid in full and on time. Increased current assets and decreased current liabilities are expected outcomes for favorable ratios.