Using ratios to analyse companies

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14. Current ratio

Definition: Current assets divided by current liabilities

Significance:

This shows how easily the company could pay its bills if all its creditors demanded payment at once.

Example

Looking at the figures in M&S's balance sheet, the calculation is:

Yardstick:

In theory this figure should be at least 1, because if it's lower than 1 it means that the company does not have the liquidity to pay all its creditors straight away.

1. Why bother with ratios? 2. A word of warning 3. The P&L and the balance sheet 4. Grouping the ratios 5. Profit margin 6. Return on capital employed (ROCE) 7. Sales as a multiple of capital employed 8. Stockturn 9. Debt collection 10. Payment of trade creditors 11. Cash-to-cash cycle 12. Gearing 13. Interest cover 14. Current ratio 15. Quick ratio (acid test) 16. Earnings ratios 17. Dividend ratios 18. Other ratios 19. Sources of information 20. Conclusion

• Magic Numbers