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Using ratios to analyse companies

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146

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:

2,366m / 1,364m = 1.7

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.

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