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Submitted by Blessed1 on July 10, 2006
Category: Business
Words: 1569 | Pages: 7
Views: 394
Popularity Rank: 22,529
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Financial Performance
Subject: Managerial Finance I
Instructor: Bob
Students: Lawrence C.
Monica E.
Carrington B.
Date: 06/13/2006
The current ratio is a comparison of a firm's current assets to its current liabilities. For example, Dell’s Inc. current assets are 16,897. (in millions) and its current liabilities are 14,136, (in millions) then its current ratio would be 16,897. (in millions) divided by 14,136, (in millions), which equals 1.1. This was the fiscal years ending January 28 ,2005
In comparison, Hewlett Packard current assets are 43,334,(in millions), and its current liabilities are 31,460, (in millions) then its current ratio would be 43,334,. (in millions) divided by 31,460, (in millions), which equals 1.1. This was the fiscal years ending October 31, 2005
The current ratio is an indication of a firm's market liquidity and ability to meet short-term debt obligations. Acceptable current ratios vary from industry to industry, but a current ratio between 1 and 1.5 is considered standard. If a company's current assets are in this range, then it is generally considered to have good short-term financial strength. If current liabilities exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term obligations. If the current ratio is too high, then the company may not be efficiently utilizing its current assets.
The Acid-test or quick ratio measures the ability of a company to use its "near cash" or quick assets to immediately extinguish its current liabilities. Quick assets include those current assets that presumably can be quickly converted to cash at close to their book values. Such items are cash, stock investments, and accounts receivable. This ratio implies a liquidation approach and does not...
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