The Current Ratio is a very important ratio for a small business like Home At Last Realty. 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 Home At Last Realty can cover its current liabilities. The higher the current ratio the greater the cushion between the current obligations of a small business like Home At Last Realty, and the firm's ability to pay them.
Here we can see that the the current ratio for Home At Last Realty is projected to be 108, 140 and 204 for the years 2012, 2013 and 2014 respectively. This of coursemeans that there will be plenty of liquidity for the business to meets its short term liabilities. Fortunately for Jose and Diana, the current liabilities are onlythe accounts payable which are projected to be $200 for the three years respectively. The reason the current assets are projected to bea robust $21k, $42k and $81k 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.
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