Your Name Movies and More Current Ratio Vs Current Liabilities

There are two formulas we use to determine the financial health of a company. The first is the current ratio which determines whether or not your current assets can cover the cost of your current liabilities. The second is working capital. Working capital also lets us know if the company’s current assets can cover the cost of its current liabilities.

Your name Movies and More had current assets of $60,316 as of January 1st, 2011. The current liabilities were $1,500. The current ratio is 60,316/1,500=40.21. A current ratio of 40.21 is excellent. It means that the company can cover its liabilities with its assets 40.21 times over. The working capital is 60,316-1,500=58,816. The working capital is also excellent because the company’s assets far outweigh its liabilities.

An increase of working capital over time isn’t necessarily a good sign. Although an increase in working capital does show that the company is able to cover its liabilities more effectively it doesn’t give a clear picture of the company’s overall financial health. An increase in working capital could be a sign that the company’s liabilities and assets have decreased. Let’s say a company has current liabilities of $75,000 and current assets of $100,000. This would make their working capital $25,000. Let’s say the next time we look at their working capital it has now increased to $50,000. One would immediately assume the company is in a better financial position but this isn’t necessarily true. Let’s say in our new scenario current liabilities are now $25,000, but current assets are down to $75,000. We don’t know why this drop in both numbers occurred. The company could have cashed in a long term asset to cover their liabilities, and the decrease in current assets could be to a loss in income.

Current asset and working capital are very important indicators to a company’s viability, but they’re not the only numbers we need