What is total current liabilities to total liabilities? What does it mean if one company has...

What is total current liabilities to total liabilities? What does it mean if one company has a higher ration than the other? What is the disadvantage?

Expert Solution

Current liabilities are the obligations of a company which it has to cater within a period of 12 months. Current liabilities are short-term obligations, that is payments due within a period of 12 months or one year.

Total liabiltiies on the other hand are the sum of current liabilties as well as long term liabilties. Long-term liabilties are the liabilities which are due after the 12 months period. In other words, obligations other than current liabilities are termed as long term liabilities.

The ratio of obligations due within 12 months period to total debt/obligations due is total current liabilities to total liabilities.

If one company has higher ratio that the other, it indicates that the short term liabilities are higher than total liabilities.

Disadvantages of higher total current liabilities to total liabilities

a. Higher total current liabilities to total liabilities indicates that most amount is due within a short period of 12 months, which indicates that alot of cash or liquidity would be requied by the company in a short span.

b. Higher current liabilities would also mean low working capital as working capital is the difference between current assets and current liabilities.

c. Higher current liabilities would indicate poor current ratio which is a major indicator of financial health of the company.

ekkarill92 answered 2 years ago

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