balance sheet assets: liability ratio

S

shopska

Guest
i am aware that the ideal assets : liability ratio is 2:1 .

When looking at the health of a balance sheet & liquidity:
is this based on current assets : current liabilities ?
or are fixed assets important in the health of a balance sheet
( if the current asset : current liability ratio is say 1:2, do fixed assets impove the situation )

like wise, are longterm liabilities incorporated when calculating this ratio?
if a co had a current asset : current liability ratio of 2:1 but had a large long term loan, how would you calculte state of bal sheet?

Thank you
 
Shopksa

The ratio you are referring to is called the "current asset ratio", it is meant to give an appreciation of whether a company has sufficient working capital to run its day to day business - pay suppliers, give credit to debtors, and hold stock, it depends on the industry what the ideal needs to be, but in most industries, 2 to 1, gives a lot of breathing space to a company and shows it has adequate working capital.

It does not take into account either long term assets (fixed assets) or long term liabilities / loans - there are other ratios which look at whether these are "in line".

Finally, all ratios are guides, to steer a company, and indicate issues, but should not be over prescriptive.
 
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