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8.3 Current Asset Ratio Analysis

The Current Ratio is a very important ratio for a small business like A Touch of Tuscany It is a key measure of the liquidity of the operations of a small business. In order to calculate the current ratio, the total current assets are divided by the total current liabilities. The resulting number shows how many times the current assets of a small business like A Touch of Tuscany can cover its current liabilities. The higher the current ratio the greater the cushion between the current obligations of a small business like A Touch of Tuscany, and the firm's ability to pay them.

Here we can see that the the current ratio for A Taste of Tuscany are proected to be 153, 234 and 329 for the years 2009, 2010 and 2011 respectively. This of coursemeans that there will be plenty of liquidity for the business to meets its short term liabilities. Fortunately for A Taste of Tuscany, the current liabilities are onlythe accounts payable which are projected to be $1019, $1039 and $1059 for the three years respectively. The reason the current assets are projected to bea robust $156k, $243k and $349k for each of the three years is that we are anticipating the business to generate a decent free cash flow which is the largestcomponent of the current assets. In the event this cash flow projection was to be affected by slower than anticipated sales, our cash position and therebythe projected current assets and resulting current asset ratio will certainly be affected negatively as well.

Quick Links:

  1. Go to the Corresponding Template section for this industry.
  2. Go to the Corresponding Questionnaire section for this industry.

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