Question

In 200 words Benedictine Monastery of Admont what the negative debt and current ratio were being negative can cause a huge financial risk. Please type

Answer 1

Current Ratio and Debt

A company with a current ratio less than one does not, in many cases, have the capital on hand to meet its short-term obligations if they were all due at once, while a current ratio greater than one indicates the company has the financial resources to remain solvent in the short-term. However, because the current ratio at any one time is just a snapshot, it is usually not a complete representation of a company’s liquidity or solvency.

For example, a company may have a very high current ratio, but its accounts receivable may be very aged, perhaps because its customers pay very slowly, which may be hidden in the current ratio. Analysts must also consider the quality of a company’s other assets versus its obligations as well. If the inventory is unable to be sold, the current ratio may still look acceptable at one point in time, but the company may be headed for default.

A current ratio of less than one may seem alarming, although different situations can affect the current ratio in a solid company. For example, a normal monthly cycle for the company’s collections and payment processes may lead to a high current ratio as payments are received, but a low current ratio as those collections ebb.

Calculating the current ratio at just one point in time could indicate the company can’t cover all its current debts, but it doesn’t mean it won’t be able to once the payments are received.

Additionally, some companies, especially larger retailers such as Wal-Mart, have been able to negotiate much longer-than-average payment terms with their suppliers. If a retailer doesn't offer credit to its customers, this can show on its balance sheet as a high payables balance relative to its receivables balance. Large retailers can also minimize their inventory volume through an efficient supply chain, which makes their current assets shrink against current liabilities, resulting in a lower current ratio. Wal-Mart's current ratio in January 2019 was 0.80.

The current ratio can be a useful measure of a company’s short-term solvency when it is placed in the context of what has been historically normal for the company and its peer group. It also offers more insight when calculated repeatedly over several periods.