🦧 follow the ratio

🤔 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)