Current Ratio

http://www.investopedia.com/terms/c/currentratio.asp

DEFINITION OF 'CURRENT RATIO'

A liquidity ratio that measures a company's ability to pay short-term obligations.

Also known as "liquidity ratio", "cash asset ratio" and "cash ratio".

INVESTOPEDIA EXPLAINS 'Current Ratio'

The ratio is mainly used to give an idea of the company's ability to pay back its short-term
liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The
higher the current ratio, the more capable the company is of paying its obligations. A ratio
under 1 suggests that the company would be unable to pay off its obligations if they came
due at that point. While this shows the company is not in good financial health, it does not
necessarily mean that it will go bankrupt - as there are many ways to access financing - but
it is definitely not a good sign.
The current ratio can give a sense of the efficiency of a company's operating cycle or its
ability to turn its product into cash. Companies that have trouble getting paid on their
receivables or have long inventory turnover can run into liquidity problems because they are
unable to alleviate their obligations. Because business operations differ in each industry, it is
always more useful to compare companies within the same industry.
This ratio is similar to the acid-test ratio except that the acid-test ratio does not include
inventory and prepaids as assets that can be liquidated. The components of current ratio
(current assets and current liabilities) can be used to derive working capital (difference
between current assets and current liabilities). Working capital is frequently used to derive
the working capital ratio, which is working capital as a ratio of sales.
Want to learn more about how to use Current Ratio? Take a look at -- Liquidity
Measurement Ratios: Current Ratio and How To Analyze A Company's Financial Position.

Liquidity Measurement Ratios: Current Ratio

http://www.investopedia.com/university/ratios/liquidity-measurement/ratio1.asp

The current ratio is a popular financial ratio used to test a company's liquidity (also referred
to as its current or working capital position) by deriving the proportion of current assets
available

to

cover

current

liabilities.

The concept behind this ratio is to ascertain whether a company's short-term assets (cash,
cash equivalents, marketable securities, receivables and inventory) are readily available to
pay off its short-term liabilities (notes payable, current portion of term debt, payables,
accrued expenses and taxes). In theory, the higher the current ratio, the better.
As of December 31, 2005, with amounts expressed in millions, Zimmer Holdings' current
assets amounted to $1,575.60 (balance sheet), which is the numerator; while current
liabilities amounted to $606.90 (balance sheet), which is the denominator. By dividing, the
equation gives us a current ratio of 2.6.

Variations:
None
Commentary:
The current ratio is used extensively in financial reporting. However, while easy to
understand, it can be misleading in both a positive and negative sense - i.e., a high current
ratio is not necessarily good, and a low current ratio is not necessarily bad (see chart
below).
Here's why: Contrary to popular perception, the ubiquitous current ratio, as an indicator of
liquidity, is flawed because it's conceptually based on the liquidation of all of a company's
current assets to meet all of its current liabilities. In reality, this is not likely to occur.
Investors have to look at a company as a going concern. It's the time it takes to convert a
company's working capital assets into cash to pay its current obligations that is the key to its
liquidity. In a word, the current ratio can be "misleading."
--

Company ABC

Company XYZ

Current Assets

$600

$300

Current Liabilities

$300

$300

Working Capital

$300

$0

Current Ratio

2.0

1.0

Company ABC looks like an easy winner in a liquidity contest. It has an ample margin of
current assets over current liabilities, a seemingly good current ratio, and working capital of
$300. Company XYZ has no current asset/liability margin of safety, a weak current ratio, and
no working capital.
However, to prove the point, what if: (1) both companies' current liabilities have an average
payment period of 30 days; (2) Company ABC needs six months (180 days) to collect its
account receivables, and its inventory turns over just once a year (365 days); and (3)
Company XYZ is paid cash by its customers, and its inventory turns over 24 times a year
(every 15 days).
In this contrived example, Company ABC is very illiquid and would not be able to operate
under the conditions described. Its bills are coming due faster than its generation of cash.
You can't pay bills with working capital; you pay bills with cash! Company's XYZ's seemingly
tight current position is, in effect, much more liquid because of its quicker cash conversion.
When looking at the current ratio, it is important that a company's current assets can cover
its current liabilities; however, investors should be aware that this is not the whole story on
company liquidity. Try to understand the types of current assets the company has and how
quickly these can be converted into cash to meet current liabilities. This important
perspective can be seen through the cash conversion cycle (read the chapter on CCC now).
By digging deeper into the current assets, you will gain a greater understanding of a
company's true liquidity.
Current Ratio - Liquidity Ratio - Working Capital Ratio

http://accounting-simplified.com/financial/ratio-analysis/current.html

1. Definition
Current ratio, also known as liquidity ratio and working capital ratio, shows the proportion of current
assets of a business in relation to its current liabilities.

3. Explanation
Current ratio expresses the extent to which the current liabilities of a business (i.e. liabilities due to be
settled within 12 months) are covered by its current assets (i.e. assets expected to be realized within 12
months). A current ratio of 2 would mean that current assets are sufficient to cover for twice the amount of
a company's short term liabilities.

4. Example
ABC PLC has the following assets and liabilities as at 31st December 2012:

$m

$m

Non Current Assets

Goodwill
Fixed Assets
Current Assets

75
75

150

Cash in hand

25

Cash in bank

50

Inventory

25

Receivable

100

200

Current Liabilities
Trade payables

100

Income tax payables

60

160

Non Current Liabilities

Bank Loan

50

Deferred tax payable

25

75

5. Interpretation & Analysis

Current ratio is a measure of liquidity of a company at a certain date. It must be analyzed in the context of
the industry the company primarily relates to. The underlying trend of the ratio must also be monitored
over a period of time.

Generally, companies would aim to maintain a current ratio of at least 1 to ensure that the value of their
current assets cover at least the amount of their short term obligations. However, a current ratio of greater
than 1 provides additional cushion against unforeseeable contingencies that may arise in the short term.
Businesses must analyze their working capital requirements and the level of risk they are willing to accept
when determining the target current ratio for their organization. A current ratio that is higher than industry
standards may suggest inefficient use of the resources tied up in working capital of the organization that
may instead be put into more profitable uses elsewhere. Conversely, a current ratio that is lower than
industry norms may be a risky strategy that could entail liquidity problems for the company.
Current ratio must be analyzed over a period of time. Increase in current ratio over a period of time may
suggest improved liquidity of the company or a more conservative approach to working capital
management. A decreasing trend in the current ratio may suggest a deteriorating liquidity position of the
business or a leaner working capital cycle of the company through the adoption of more efficient
management practices. Time period analyses of the current ratio must also consider seasonal
fluctuations.

6. Industry standards
Current ratio must be analyzed in the context of the norms of a particular industry. What may be
considered normal in one industry may not be considered likewise in another sector.
Traditional manufacturing industries require significant working capital investment in inventory, trade
debtors, cash, etc, and therefore companies operating in such industries may reasonably be expected to
have current ratios of 2 or more.
However, with the advent of just in time management techniques, modern manufacturing companies have
managed to reduce the size of buffer inventory thereby leading to significant reduction in working capital
investment and hence lower current ratios.
In some industries, current ratio of lower than 1 might also be considered acceptable. This is especially
true of the retail sector which is dominated by giants such as Wal-Mart and Tesco. This primarily stems
from the fact that such retailers are able to negotiate long credit periods with suppliers while offering little
credit to customers leading to higher trade payables as compared with trade receivables. Such retailers
are also able to keep their own inventory volumes to minimum through efficient supply chain
management.
Current ratios of Wal-Mart Stores, Inc and Tesco PLC as per 2011 annual reports are 0.88 and 0.65
respectively.

7. Importance

Current ratio is the primary measure of a company's liquidity. Minimum levels of current ratio are often
defined in loan covenants to protect the interest of the lenders in the event of deteriorating financial
position of the borrowers. Financial regulations of various countries also impose restrictions on financial
institutions to lend credit facilities to potential borrowers that have a current ratio which is lower than the
defined limits.

Current Ratio
http://www.myaccountingcourse.com/financial-ratios/current-ratio

The current ratio is a liquidity andefficiency ratio that measures a firm's ability to pay off its
short-term liabilities with its current assets. The current ratio is an important measure of
liquidity because short-term liabilities are due within the next year.
This means that a company has a limited amount of time in order to raise the funds to pay
for these liabilities. Current assets like cash, cash equivalents, and marketable securities
can easily be converted into cash in the short term. This means that companies with larger
amounts of current assets will more easily be able to pay off current liabilities when they
become due without having to sell off long-term, revenue generating assets.
GAAP requires that companies separate current and long-term assets and liabilities on
thebalance sheet. This split allows investors and creditors to calculate important ratios like
the current ratio. On U.S. financial statements, current accounts are always reported before
long-term accounts.

Analysis
The current ratio helps investors and creditors understand the liquidity of a company and
how easily that company will be able to pay off its current liabilities. This ratio expresses a
firm's current debt in terms of current assets. So a current ratio of 4 would mean that the
company has 4 times more current assets than current liabilities.

A higher current ratio is always more favorable than a lower current ratio because it shows
the company can more easily make current debt payments.
If a company has to sell of fixed assets to pay for its current liabilities, this usually means the
company isn't making enough from operations to support activities. In other words, the
company is losing money. Sometimes this is the result of poor collections of accounts
receivable.
The current ratio also sheds light on the overall debt burden of the company. If a company is
weighted down with a current debt, its cash flow will suffer.

Example
Charlie's Skate Shop sells ice-skating equipment to local hockey teams. Charlie is applying
for loans to help fund his dream of building an indoor skate rink. Charlie's bank asks for his
balance sheet so they can analysis his current debt levels. According to Charlie's balance
sheet he reported $100,000 of current liabilities and only $25,000 of current assets.
Charlie's current ratio would be calculated like this:

As you can see, Charlie only has enough current assets to pay off 25 percent of his current
liabilities. This shows that Charlie is highly leveraged and highly risky. Banks would prefer a
current ratio of at least 1 or 2, so that all the current liabilities would be covered by the
current assets. Since Charlie's ratio is so low, it is unlikely that he will get approved for his
loan.

What is the current ratio?

http://www.accountingcoach.com/blog/current-ratio-2

The current ratio is a financial ratio that shows the proportion of current assets to current liabilities.
The current ratio is used as an indicator of a company's liquidity. In other words, a large amount of
current assets in relationship to a small amount of current liabilities provides some assurance that
the obligations coming due will be paid.
If a company's current assets amount to $600,000 and its current liabilities are $200,000 the current
ratio is 3:1. If the current assets are $600,000 and the current liabilities are $500,000 the current ratio
is 1.2:1. Obviously a larger current ratio is better than a smaller ratio. Some people feel that a current
ratio that is less than 1:1 indicates insolvency.
It is wise to compare a company's current ratio to that of other companies in the same industry. You
are also wise to look at the trend of the current ratio for a given company over time. Is the current
ratio improving over time, or is it deteriorating?
The composition of the current assets is also an important factor. If the current assets are
predominantly in cash,marketable securities, and collectible accounts receivable, that is more
comforting than having the majority of the current assets in slow-moving inventory.

current ratio
http://www.investorwords.com/1258/current_ratio.html
Definition

An indication of a company's ability to meet short-term debt obligations; the higher the ratio,
the more liquid the company is. Current ratio is equal to current assets divided by current
liabilities. If the current assets of a company are more than twice the current liabilities, then
that company is generally considered to have good short-term financial strength. If current
liabilitiesexceed current assets, then the company may have problems meeting its shortterm obligations.
For example, if XYZ Company's total current assets are $10,000,000, and its total current
liabilities are $8,000,000, then its current ratio would be $10,000,000 divided by $8,000,000,

which is equal to 1.25. XYZ Company would be in relatively good short-term

financial standing.
Also see: List of Important Financial Ratios for Stock Analysis at InvestorGuide.com.

Current Ratio
http://www.readyratios.com/reference/liquidity/current_ratio.html
Definition
The current ratio is balance-sheet financial performance measure of company liquidity.
The current ratio indicates a company's ability to meet short-term debt obligations. The current ratio
measures whether or not a firm has enough resources to pay its debts over the next 12 months.
Potential creditors use this ratio in determining whether or not to make short-term loans. The current
ratio can also give a sense of the efficiency of a company's operating cycle or its ability to turn its
product into cash. The current ratio is also known as the working capital ratio.
Norms and Limits
The higher the ratio, the more liquid the company is. Commonly acceptable current ratio is 2; it's a
comfortable financial position for most enterprises. Acceptable current ratios vary from industry to
industry. For most industrial companies, 1.5 may be an acceptable current ratio.
Low values for the current ratio (values less than 1) indicate that a firm may have difficulty meeting
current obligations. However, an investor should also take note of a company's operating cash flow
in order to get a better sense of its liquidity. A low current ratio can often be supported by a strong
operating cash flow.
If the current ratio is too high (much more than 2), then the company may not be using its current
assets or its short-term financing facilities efficiently. This may also indicate problems in working
capital management.
All other things being equal, creditors consider a high current ratio to be better than a low current
ratio, because a high current ratio means that the company is more likely to meet its liabilities which
are due over the next 12 months.

Exact Formula in the ReadyRatios Analytic Software

Current ratio = F1[CurrentAssets]/F1[CurrentLiabilities]
F1 Statement of financial position (IFRS).

The Current Ratio

http://www.accountingtools.com/current-ratio

The current ratio measures the ability of an organization to pay its bills in the near-term. The ratio is
used by analysts to determine whether they should invest in or lend money to an entity.
For example, a supplier wants to learn about the financial condition of Lowry Locomotion. The supplier
calculates the current ratio of Lowry for the past three years:
Year 1

Year 2

Year 3

Current assets

$8,000,000

$16,400,000

$23,400,000

Current liabilities

$4,000,000

$9,650,000

Current ratio

2:1

1.7:1

$18,000,000
1.3:1

The sudden rise in current assets over the past two years indicates that Lowry has undergone a rapid
expansion of its operations. Of particular concern is the increase in accounts payable in Year 3, which
indicates a rapidly deteriorating ability to pay suppliers. Based on this information, the supplier elects
to restrict the extension of credit to Lowry.
Since the ratio is current assets divided by current liabilities, the ratio essentially implies that current
liabilities can be liquidated to pay for current liabilities. A current ratio of 2:1 is preferred, with a lower
proportion indicating a reduced ability to pay in a timely manner.
The current ratio can yield misleading results under the following circumstances:

Inventory component. When the current assets figure includes a large proportion of inventory
assets, since these assets can be difficult to liquidate. This can be a particular problem if management

is using aggressive accounting techniques to apply an unusually large amount of overhead costs to
inventory, which further inflates the recorded amount of inventory.

Paying from debt. When a company is drawing upon its line of credit to pay bills as they come
due, which means that the cash balance is near zero. In this case, the current ratio could be fairly low,
and yet the presence of a line of credit still allows the business to pay in a timely manner. In this
situation, the organization should make its creditors aware of the size of the unused portion of the line
of credit, which can be used to pay bills.

Limitations of the Current Ratio Analysis

http://www.currentratioformula.com/2012/05/limitations-of-current-ratio-analysis.html
One of the major limitations of the current ratio is that it does not focus on the quality of the current
assets. For this reason this also called as the crude ratio. It does not gives the accurate and more precise
idea of firms liquidity or financial position as a firm may be in trouble because of the more stock and
operations that can not be converted in cash in a small period of time. Valuation of the current assets is
also an issue in calculating the current ratio as the figure of the current ratio can be easily manipulated by
overvaluing the current assets of the firm.
Another drawback of current ratio is that it does not tell anything about the profitability of the company. It
does not indicate whether the production cost is high and it may result in incurring a loss to the company.
Its also not tells about the sale price that whether it is low or not.
The formula of the current ratio is not applicable to the seasonal products and hence does not give a clear
idea of the product performance throughout the year. Another limitation of the current ratio is that it is
calculated on the figures of current assets and liabilities taken from the balance sheet. There is a
continuous threat that these figures may be out dated and will not calculate the current ratio accurately
regarding a specific time period. Different businesses and industries interpret current ratio in different
ways such as higher the current ratio means the firm has high amount of cash in hand and it has problem
in investing the capital which is taken as a negative point of the company. On the other hand low current
ratio means that company is at high risk of liquidity and is unable to fulfill its financial obligation which
again is considered to be the negative point of the company.

Advantages and Disadvantages of Current Ratio

http://www.efinancemanagement.com/financial-analysis/advantages-and-disadvantages-of-current-ratio
Current ratio is one of the most useful ratios in financial analysis as it helps to gauge the liquidity position
of the business. In simple words, it shows a companys ability to convert its assets into cash to pay off its
short-term liabilities. The article discusses different advantages and disadvantages of current ratio.
It is calculated as a ratio of a companys current assets to its current liabilities. Current ratio is widely used
by banks and financial institutions while sanctioning loans to the companies and therefore this is a vital
ratio for any company. There are different ways of analysing and improving current ratio to portray a better
liquidity position of a company.
Along with knowing how to analyse and improve current ratio, it is important to know the advantages and
disadvantages of using current ratio
Advantages of Current Ratio:

Current ratio helps in understanding how cash rich a company is. It helps us gauge the short-term
financial strength of a company. Higher the ratio, more stable the company is. Lower the ratio, greater
is the risk of liquidity associated with the company.

Current ratio gives an idea of a companys operating cycle. It helps in understanding how efficient
the company is in selling off its products; that is, how quickly is the company able to convert its
inventory or current assets into cash. Knowing this, company can optimize its production. This enables
the company to plan inventory storage mechanisms and optimize the overhead costs.

Current ratio as shows the managements efficiency in meeting the creditors demands. It gives
an understanding of working capital management / requirement of the company.

Disadvantages of Current Ratio:

Using this ratio on a standalone basis may not be sufficient to analyse the liquidity position of the
company as it relies on the quantity of current assets instead of quality of the asset.

Current ratio includes inventory in the calculation, which may lead to overestimation of the
liquidity position in many cases. In companies, where higher inventory exists due to less sales or
obsolete nature of the product; taking inventory under calculation may lead to displaying incorrect
liquidity health of the company.

In companies where sales are seasonal; current ratio may show lower numbers in some months

and higher current ratio in the other.

Current Ratio may be impacted due to change in inventory valuation methodology by the

company. Such will not be a case while using the Acid test ratio since it does not consider inventory at
all.

An equal increase or decrease in the current assets and current liabilities can change the ratio.
Hence an overdraft against inventory can cause current ratio to change. Hence it is very easy to
manipulate current ratio.

Conclusion:
Current ratio is a very good indicator of liquidity position of the company amid certain limitations which
one needs to keep in mind before using and interpreting the ratio. One can look to use Acid test ratio that
does away with some limitations of current ratio; however any of these ratios need to be used in
comparison/conjunction with other measures to interpret the short-term solvency of the company.

How to analyze and improve Current Ratio?

http://www.efinancemanagement.com/financial-analysis/how-to-analyze-and-improve-current-ratio
Current ratio is a critical liquidity ratio utilized extensively by banks and other financing institutions while
extending loans to the businesses. How to improve current ratio? is a very common question which
keeps hitting the entrepreneurs mind every now and then. For improving current ratio, the management
needs to focus on various strategies including its current liabilities and assets which is not a onetime
activity. It has to be monitored throughout the year.
Current ratio is a figure resulted from dividing current assets by current liabilities of a firm. This figure is
important because it measures the liquidity stand of a firm. Normally, it is assumed that higher the ratio,
higher is the liquidity and vice versa. It would be unfair if the liquidity is concluded just on the basis of the
ratio. Without going further to know what is making that ratio, it is difficult to form an opinion over it. It can
be well explained with following situations:

1.

Normally, a dipping sale would increase the level of inventories. Claims of creditors cannot be
settled with inventory, it would require hard cash. Undoubtedly, the ratio in this case is increasing but
without improving the liquidity.

2.

Secondly, delayed payments by customers will lead to increase the debtors level and
eventually the current assets and therefore the current ratio. Here also, we can see the increase in the
current ratio but decline in the real level of liquidity.
3. Sell-off Unproductive Assets: Cash level can be increased by selling unused fixed assets.
Otherwise the money is unnecessarily blocked into them and idle money accrues interest cost.
4. Improve Current Asset by Rising Shareholders Funds: When the current assets are financed
by equity rather than the creditors, the level of current assets would increase with current
liabilities remaining the same. Consequently, this exercise will improve the current ratio. Taking
the improvement of current ratio into view, drawings are not advisable. It is because drawings
would reduce capital invested in the current assets and therefore the level of current liabilities will
increase to finance the current asset. All this directs impacts the current ratio. In essence, owners
fund i.e. capital and reserves and surpluses should remain invested in the firm to balance the
current ratio.
5. Sweep Bank Accounts: First of all, the management of the firm should always try to cut down on
hard cash levels and keep the money in bank accounts. Facility of sweeping should be availed in
the bank accounts which almost every bank and financial institution is providing. Sweeping is a
facility by which excess fund are transferred from current account to another account which
fetches interest on that fund. At the same time, these funds are available to use when required.

6.

It can be well established with the above examples that a current ratio of 1:1 is not sufficient
because all the current assets are not easily converted into cash. A cushion over and above 1 is
always required. This cushion is technically called Margin of Safety. In other words, current assets
over and above the current liabilities are the margin of safety. We need marginal current assets simply
as all the current assets are easily liquidated to cash.

How to improve the current ratio?

Faster Conversion Cycle of Debtors or Accounts Receivables: Faster rolling of money via
debtors will keep the current ratio in control. At least, the ratio will show a correct picture if the debtors
are liquid. A constant follow up with the debtors can improve the collections from them. In the first

dealing itself, the payment terms should be made clear and should negotiate credit period as low as
possible.
Pay off Current Liabilities: Not only does the current ratio depend on current assets, it is equally

dependent on the current liability which is the denominator. They should be paid off as often and as
early as possible. It would decrease the level of current liabilities and therefore improve the current
ratio. Early payments to creditors can save interest cost and earn discount which will have direct
impact to the profits of the firm.

What are the limitations of ratio analysis?

http://www.accountingtools.com/questions-and-answers/what-are-the-limitations-of-ratio-analysis.html
Ratio analysis can be used to compare information taken from the financial statements to gain a
general understanding of the results, financial position, and cash flows of a business. This analysis is a
useful tool, especially for an outsider such as a credit analyst, lender, or stock analyst. These people
need to create a picture of the financial results and position of a business just from its financial
statements.
However, there are a number of limitations of ratio analysis that you should be aware of. They are:
Historical. All of the information used in ratio analysis is derived from actual historical results.

This does not mean that the same results will carry forward into the future. However, you can use
ratio analysis on pro forma information and compare it to historical results for consistency.
Historical versus current cost. The information on the income statement is stated incurrent

costs (or close to it), whereas some elements of the balance sheet may be stated at historical
cost (which could vary substantially from current costs). This disparity can result in unusual ratio
results.

Inflation. If the rate of inflation has changed in any of the periods under review, this can mean
that the numbers are not comparable across periods. For example, if the inflation rate was 100% in
one year, sales would appear to have doubled over the preceding year, when in fact sales did not
change at all.

Aggregation. The information in a financial statement line item that you are using for a ratio
analysis may have been aggregated differently in the past, so that running the ratio analysis on a
trend line does not compare the same information through the entire trend period.

Operational changes. A company may change its underlying operational structure to such an
extent that a ratio calculated several years ago and compared to the same ratio today would yield a
misleading conclusion. For example, if you implemented a constraint analysissystem, this might lead
to a reduced investment in fixed assets, whereas a ratio analysis might conclude that the company is
letting its fixed asset base become too old.

Accounting policies. Different companies may have different policies for recording the same
accounting transaction. This means that comparing the ratio results of different companies may be like
comparing apples and oranges. For example, one company might use accelerated depreciation while
another company uses straight-line depreciation, or one company records a sale at gross while the
other company does so at net.

Business conditions. You need to place ratio analysis in the context of the general business
environment. For example, 60 days of sales outstanding might be considered poor in a period of
rapidly growing sales, but might be excellent during an economic contraction when customers are in
severe financial condition and unable to pay their bills.

Interpretation. It can be quite difficult to ascertain the reason for the results of a ratio. For
example, a current ratio of 2:1 might appear to be excellent, until you realize that the company just
sold a large amount of its stock to bolster its cash position. A more detailed analysis might reveal that
the current ratio will only temporarily be at that level, and will probably decline in the near future.

Company strategy. It can be dangerous to conduct a ratio analysis comparison between two
firms that are pursuing different strategies. For example, one company may be following a low-cost
strategy, and so is willing to accept a lower gross margin in exchange for more market share.
Conversely, a company in the same industry is focusing on a high customer service strategy where its
prices are higher and gross margins are higher, but it will never attain the revenue levels of the first
company.

Point in time. Some ratios extract information from the balance sheet. Be aware that the
information on the balance sheet is only as of the last day of the reporting period. If there was an
unusual spike or decline in the account balance on the last day of the reporting period, this can impact
the outcome of the ratio analysis.
In short, ratio analysis has a variety of limitations that can limit its usefulness. However, as long as
you are aware of these problems and use alternative and supplemental methods to collect and
interpret information, ratio analysis is still useful.