Current Ratios are used to identify trends over time. Bankers and lenders use Current Ratios to analyze the financial health of a business.
In this video…
Hi, Greg here for On Track Business Management. In this video, we’ll be talking about current ratios.
Ratios are used to identify trends over time. Financial statement ratios focus on three key aspects of a business: liquidity, profitability, and solvency. Bankers, other lenders, and bonding agents use ratios in analyzing your business. You’ll have an edge when you know how your business looks to potential lenders.
Ratios tell the story of changes in the financial condition of your business. Ratios help spot trends in your business, help you compare performance of your business to other businesses.
Current ratio is one of the best measures of financial strength. To find the current ratio, we take the total current assets and divide by total current liabilities. A ratio under 1 suggests that the company would be unable to pay its debts. The larger the ratio is, the more liquid the business is. If you’re watching your current ratio monthly, you’ll soon know what rate works for your company, and you’ll be able to take action if the ratio starts slipping.
In the next video, we’ll talk about another ratio, the gross profit margin ratio, and some action steps you can take to continue learning about your financial reports.
Next Video: Gross Profit Margin