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🦧 follow the ratio
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🦧 follow the ratio

Ape of Omaha
Jul 26, 2022
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🦧 follow the ratio
www.wiseape.fyi

🤔 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

      • cash

      • 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)

      • etc.

    • liabilities = what the company owes

      • debts

      • 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

    • LUV 0.00 (southwest) = 1.90

    • UAL 0.00 (united) = 1.00

    • AAL 0.00 (american) = 0.80

    • DAL 0.00 (delta) = 0.70

  • 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!

 

Ask a Wise Ape is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.

 
as always, i am no financial advisor! (i am no substitute for professional financial services)
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2 Comments
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Jul 26, 2022Liked by Ape of Omaha

i really liked today's newsletter! i'd never head of this ratio. thanks for the useful insights

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