🤔 why current ratio matters
today i’ll write about the current ratio – one of many ways to measure a company’s financial health or capabilities
this might sound like some accounting stuff… (it is), but it also helps you understand price movements!
💡 the formula
let’s break down the formula: current ratio = current assets / current liabilities
assets = what the company owns
accounts receivable (this means when you’ve already delivered the service or the product, but you have yet to receive revenue for it)
marketable securities (if the company owns, say, treasuries)
inventory (stuff you have ready to be sold but you haven’t sold them yet - sooner or later, once you sell them, it will become cash which you’ll own)
liabilities = what the company owes
accounts payable = (kinda the flip side of accounts receivable - if you've already received, say, raw materials from suppliers but you haven't paid them yet
“current” = anything within a year
so that’s assets that can be turned into cash within a year (intellectual property, real estate)
and short-term debts that you have to pay back within a year
✈️ high is good, low is bad
to make it crystal clear – a high current ratio (say, higher than 1) means you have more current assets than current liabilities
let’s compare the currents ratios of these 4 airlines
notice how different the currents ratios can look like for these four companies that are in the same industry!
on that note, one should only use the current ratio to compare companies within the same industry and to compare a company’s current ratio with its industry average
💡 something im thinking about
a record 887 super yachts were sold last year - twice the number sold in 2020 (click on the image above for the new yorker article)
all of this is just one ape’s thoughts, but I would love to hear what you want to know about! happy trading!
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i really liked today's newsletter! i'd never head of this ratio. thanks for the useful insights