Question

Do you believe that if the company's current assets equal current liabilities then the company should have no problem managing its immediate debts?

Answer 1

Solution:

When a company's current assets equal its current liabilities, it means that the company's current ratio = 1 because the formula for current ratio is Current assets​​/Current liabilities​​. The current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year. It tells investors and analysts how a company can maximize the current assets on its balance sheet to satisfy its current debt and other payable.

The current ratio is sometimes referred to as the “working capital” ratio and helps investors understand more about a company’s ability to cover its short-term debt with its current assets. A current ratio of less than one may seem alarming, although different situations can affect the current ratio in a solid company. For example, a normal monthly cycle for the company’s collections and payment processes may lead to a high current ratio as payments are received, but a low current ratio as those collections ebb.

A company with a current ratio less than one does not, in many cases, have the capital on hand to meet its short-term debt obligations if they were all due at once, while a current ratio of one or greater than one indicates the company has the financial resources to remain solvent in the short-term.

Hence, a company whose current assets equal current liabilities should not have no problem managing its immediate or short term debts.