Сборник бизнес-кейсов алматы, 2015 Выпуск 1
How is the Current Ratio linked to a company’s long-term solvency?
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| 4. How is the Current Ratio linked to a company’s long-term solvency?
The instructor should guide the students in following direction: the requirement to maintain the Current Ratio at a certain level has a deep theoretical. The interpretation of this ratio connected with an important hypothesis about the correct arranging financing: companies do not use short-term sources of financing for the acquisition of long-term assets. To clarify this hypothesis, it would be useful to go back to the board with the formula of a Current Ratio (Figure 1) and transform it. Figure 1: Current Ratio Or after transformation: Figure 1: Current Ratio CR = Current Assets Current Liabilities = Total Assets minus Non-Current Assets OR (Current Liabilities plus Non-Current Liabilities plus Equity) minus Non-current Assets Current Liabilities 76 From this, the students will see that the reasons for liquidity deterioration might to be found in the components of fixed capital, such as an amount of equity (mostly earned profit over the period) and long-term loans, as well as in the size of non-current assets (including capital costs). Investments (con- struction of new capacities, acquisition of equipment and other companies, etc.) in excess of a compa- ny’s financial possibilities (mainly of earned profit) would require new debts. The growth of non- current assets greater than that of borrowed funds could lead to lower liquidity. The other cause for the decrease of liquidity is associated with the funding costs for the acquisition of long term assets. Financial management rules are simple and logical: long-term loans should be in- volved in the financing of capital expenditures, and short-term - for working capital. In another words, to maintain an acceptable liquidity, value of capital expenditures should not exceed the sum of earned profit and involved long-term loans over the period. жүктеу/скачать 3.48 Mb. Достарыңызбен бөлісу:
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