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8.3 Current Asset Ratio Analysis

The Current Ratio is a very important ratio for a small business like Central Plumbing and Heating. 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 can cover its current liabilities. The higher the current ratio the greater the cushion between the current obligations of a Central Plumbing and Heating, and the firm's ability to pay them using their short term cash equivalent assets.

Here we can see that the current ratio for Central Plumbing and Heating are projected to be 163, 262 and 360 for the years 2015, 2016 and 2017 respectively. This of coursemeans that there will be plenty of liquidity for the business to meets its short term liabilities. Fortunately for Central Plumbing and Heating, the current liabilities are onlythe accounts payable which are projected to be $429, $488 and $563 for the three years respectively. The reason the current assets are projected to bea robust $70,000, $127,887 and $202,566 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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