Analysis of Asset Allocation

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Fundamental Analysis: Liquidity Ratio
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Current Asset and Liabilities

These are the short items in the assets and liabilities of the company. As we have seen in the limitations of the balance sheet, some items can be under or over estimated in the balance sheet. This is usually not the case with the currents items as they are short term.

Current assets are made of (but not limited to) cash, accounts receivable, notes receivable and inventories.

Current liabilities are made of  (but not limited to) accounts payable and notes payable.

Because the current value of the long term assets is so difficult to determine, current items are used to evaluate the liquidity of a company.

The liquidity tells you how much cash the company could come up with if it had to sell everything immediately.

The measure the liquidity, the current ratio is often used:

Current ratio = Current assets / Current liabilities

The good value of the current ratio depends of the industry and company's figures must be compared with his competitors and the industry.

If the current ratio is below one, it means that the company uses long term funding to finance short term activities and/or the the company has some room for new investments without borrowing.

Another way of measuring the liquidity is the working capital.

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