0
How to Improve Current Asset RatioInvestors, managers, business owners and other stakeholders use financial ratios to measure the performance of companies. The current asset ratio, or working capital ratio, is one commonly used tool that measures the liquidity and financial position of a company. It is calculated by adding up all of the company's current assets and dividing them by the total amount of the company's current liabilities. This ratio is used to determine how well a company is able to pay its obligations
Understand what short-term means. Short-term assets refer to assets that are very liquid. Assets are things a company owns that have value. If an asset is short-term, it means the company can easily turn the asset to cash in one year or less. Short-term assets include cash, supplies and accounts receivable. Accounts receivable is an account that tracks amounts owed to the company. Short-term liabilities refer to amounts the company owes to other businesses or individuals that are due within one year or less.
Calculate the current asset ratio. Before you can try improving this ratio, you must know what your company's current asset ratio is. Add up all current assets and divide this amount by the total of all current liabilities. A ratio of two or higher is considered good. Companies with ratios of two or higher are often more likely to have fewer issues paying their debts.
Pay off some of the current liabilities. For example, if your company has $50,000 in current assets, with $30,000 in cash, and $35,000 in current liabilities, the current ratio is 1.4. To improve this, consider using some of the cash to pay off the debts. If you use $20,000 of the cash to pay off debts, the ratio changes to $30,000 in current assets divided by $15,000 in current liabilities, resulting in a current ratio of 2.
Pay off as much debt as possible. If you want to improve the current ratio by using all your cash to pay off debt in the example, the current asset ratio would improve to 4. This is calculated by using the full $30,000 in cash to pay off the debt, leaving only $5,000 in debt. This leaves $20,000 in current assets divided by $5,000 in debt, causing the current ratio to significantly improve.
Take out long-term debt. Another way to improve the current ratio is to take a long-term loan for all of the current debt. By doing this, the current liabilities are completed eliminated which results in a terrific current asset ratio. The debt; however, is still there, but will be paid over a longer time span.
Read more: How to Improve Current Asset Ratio | eHow.com http://www.ehow.com/how_8396521_improve-current-asset-ratio.html#ixzz1J2uAwejw
Wiki User
∙ 12y ago
Add your answer:
Earn +20 pts
What current ratio indicates?
Current Ratio is when you take your current assets divided by your current liabilities. This is one of the best known and most widely used ratios. Because current assets and liabilities are, in principle, converted to cash over the following 12 months, the current ratio is a measure of short-term liquidity. The unit of measurement is either dollars or times. For example, you could say ABC Corp has $1.50 in current assets for every $1 in current liabilities, or you could say that ABC Corp has its current liabilities covered 1.5 times over. To a creditor, the higher the ratio the better. To the firm, a high current ratio indicates liquidity, but it also may indicate and inefficient use of cash and other short-term assets. Absent some extraordinary circumstances, we would expect to see a current ratio of at least 1, because a ratio of less than 1 would imply a negative working capital number, which which over time could mean insolvency. Generally, a number closer to the 2 range would be most desirable for most industries.
What would happen to external fund requirements if a company reduces its dividend payout ratio?
if they reduced the dividend ratio i guess the companys external fund will be less.. because they will have more fund on hand so they wont be in need of that much of loan or they might not of need of loan at all
A co current assets are 96500 and current liabilities are 58600 The company wants a loan of 25000 for a 6 month period What is the current ratio after the loan?
current liabilities at present 58600, when loan is taken, the amount will become 58600+25000=83600 current ratio would be 96500/83600 = 1.1543 Aruna Joshi
What is the ideal Current Ratio of a firm?
Liquidity and debt-equity ratios are widely used financial ratios. Liquidity ratio, also called the 'short-term solvency' ratio shows the adequacy or otherwise of working capital for a company's day-to-day operations. It is calculated as current assets/current liabilities. An ideal current ratio would be 2, indicating that even if the current assets are to be reduced by half, the creditors will be able to able to get their money in full. But a lot depends on the composition of current assets. If a substantial portion of the current assets is made of slow-moving/obsolete stocks or if the debtors comprise ageing debts, the company may not be able to pay the creditors even if the current ratio is higher than 2.
A firm wants to strengthen its financial position what actions would increase its current ratio?
A firm wants to strengthen its financial position. Which of the following actions would INCREASE its current ratio? A. Reduce the company's days' sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment. B. Use cash to repurchase some of the company's own stock. C. Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year. D. Issue new stock, then use some of the proceeds to purchase additional inventory and hold the remainder as cash. E. Use cash to increase inventory holdings. Best answer is available at www onlinesolutionproviders com
Current ratio would normally increased by?
The current ratio is an accounting measure of liquidity and is defined by: Current Assets / Current Liabilities In order to increase the current ratio, either increase current assets (e.g. cash, inventory, accounts receivable) or to decrease current liabilities (e.g. accounts payable, notes payable).
How does elasticity affect a companys pricing policy?
If demand is elastic at the current price, the company knows that an increase in price would reduce total revenues.
which of the of the following would increase a company current ratio?
Increasing Cash Reserves: If a company holds more cash or cash equivalents, it will increase its current assets, which would raise the current ratio. Reducing Short-Term Debt: Paying off or reducing short-term debt, such as accounts payable or short-term loans, will decrease current liabilities, resulting in a higher current ratio. Increasing Accounts Receivable Collections: If a company collects outstanding accounts receivable more promptly, it will increase its cash or current assets, which can raise the current ratio. Decreasing Inventory Levels: Reducing excess inventory can decrease current assets, but it can also reduce current liabilities if the company has short-term loans secured by inventory. This can potentially increase the current ratio. Increasing Current Assets: By increasing any of the current assets, such as accounts receivable, prepaid expenses, or marketable securities, without a corresponding increase in current liabilities, the current ratio will go up. Restructuring or Refinancing Short-Term Debt: If a company restructures or refinances its short-term debt to extend maturity dates, it can reduce the current portion of long-term debt, which would decrease current liabilities and raise the current ratio.
What is the effect of a purchase of inventory on account on the current ratio and on working capital respectivelyAssume a current ratio greater than one prior to this transaction?
Purchase of inventory can either be on cash or credit. In the first case, while the value of your inventory would increase, your bank balance would decrease, leading to no change in the current assets and, therefore, no change in the current ratio as well. If goods are bought on credit, while your current assets will increase, so will your current liabilities (as you now owe creditors more), leading to no change in the current ratio, again. Due to the same reasons, whether the purchase was on cash or credit, the working capital also remains the same. If bought on cash, the value of inventory increase while cash decreases, leading to no change in the total current assets and, thus, no change in working capital. If goods are bought on credit, current assets increase and also current liabilities, leading to no change in the working capital, again.
What is CT ratio?
CT ratio is the ratio of primary (input) current to secondary (output) current. A CT with a listed ratio of 4000:1 would provide 1A of output current, when the primary current was 4000A.
If the Fed were to impose a slight increase in the required reserves ratio there would be .?
If the Fed were to impose a slight increase in the required reserves ratio, there would be _____.
What is the Ratio of potential differences across a device to the current that passes through it?
the ratio would be 2:1.
Would increasing the resistance increase electric current?
no
What ratio ct to use for a 250 to 5 rated kwh meter?
The ratio would be a 50:1 current transformer.
What increases when current increases?
If current increases, then voltage also has to increase, assuming that resistance stay relatively the same. Power will also increase. Since power is the product of voltage and current, then the power increase would be the square of the voltage or current change.
What would happen if you reduced the resistance in a circut?
current will increase
Which measure would a long term creditor be least interested in reviewing?
current ratio
