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| Date: Thursday 02nd 2010f September 2010 12:04:53 PM |
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The Importance of Current Ratio - 09/14/2005 |
| By: Novice Investing Staff |
| If you recall, we have three criteria when choosing investment for our stock portfolio. The first and most important criteria is a quarterly current ratio that is greater than one and is stable or rising. Current ratio is a powerful tool in predicting incoming cash crunch. So, what is current ratio? |
| Current ratio is calculated by dividing current asset with current liabilities. These can be found in the balance sheet of a company. Financial publications like Yahoo! Finance have made it easy for individual investors to find these numbers. Looking at the equation, current ratio above one implies that a company can satisfy its short-term obligation. Current ratio of less than one, you are looking at companies that are about to go under, if things don't change. |
| Back in November 2004, we used Delta Airline as an example of deteriorating current ratio. Click here to view the article. How about now? Looking at Delta's current ratio for the last four quarters, it has gotten worse from the previous year. Here is Delta's quarterly current ratio from Sept 04 till June 2005: 0.559, 0.607, 0.564, 0.547. We get the figure from Delta's balance sheet in Yahoo! Finance. The current ratio are all less than one, which is terrible. Furthermore, the trend is declining. To be honest, we are not sure how Delta can still survive this long. It needs to hold off payments to its creditors to avoid getting a cash crunch. The latest news from Delta is that it is in the verge of declaring bankruptcy. |
| Current ratio of one falls in the borderline of a dangerous territory of bankruptcy. Generally, current ratio greater than 1.5 is deemed to be safe. However, the ratio varies depending on the industry. In our exercise, Delta Current Ratio accurately predict an imminent cash crunch. Other companies that has a deteriorating current ratio of less than one? Northwest Airlines (symbol: NWAC). If things don't change, it might follow Delta's path. |
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| Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Delta Airlines Inc..(DAL) or other securities. |
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