Solvency ratio is used to analyze the company’s financial position. It measures the potential of the company regarding its ability to service its debts. It indicates to what extent the company is dependent upon its creditors to run its operations and can it continue to service its obligations for a long period of time. The current ratio is one of the important solvency ratios which help to decode the company’s debt servicing obligations. Let us discuss.
Current ratio is used to analyze the ability of the company to service its short term and long term obligations. This ratio considers the current total assets which includes both liquid and illiquid assets relative to company’s current total liabilities. The current ratio is known as “current “as it incorporates all current assets and liabilities for a shorter duration of time. It basically means how fast a company can liquidate its assets to pare of its debt obligations under any contingency.
A high current ratio indicates that the company is more capable of paring off its debt obligations. If the current ratio is below 1, it indicates that the company’s liabilities are greater than its assets. This also indicates that the company may fail to pay off its debt obligations. If the ratio is more than 1 then it indicates that the company will be able to service its debt obligation more easily.
Current ratio = Current Assets /Current Liabilities
Therefore, a firm with current assets of Rs 1,59,851 and current liabilities of Rs. 64,527 would have current ratio of 1,59,851 /64,527 = 2.48
We don’t have to calculate current ratio on our own. StockEdge gives us current ratio of the last five years of any company listed in the stock exchange. We can look and compare the current ratio of any company and filter out stocks accordingly from its in built scan option in the app.
Suppose we want to look at the current ratio of Adani Enterprises Ltd. of last 5 years. In the Fundamental tab of current ratio, click on the fundamentals tab, we will get Ratios tab. Then in the Ratios tab click on Solvency Ratios, current ratio will come of Adani Enterprises Ltd.
When we analyze the current ratio, it is best to compare the company with their industry peers with similar business models to establish the level of liquidity required by the Industry. We have these parameters freely available under every stock. So if you have not downloaded our app then download it immediately to do your own research. We also have paid featured scans based on Solvency, with the help of these ready-made scans you can with the click of a button filter out good companies for investment purpose. These scans are part of the premium offerings of StockEdge app.
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