Week - 5 Journal



Week - 5 Journal

Q. Reflect for a moment on the ratios (working capital, current ratio, quick ratio, debt to asset, debt to equity, times interest earned, gross margin and net margin) presented this week.  If you were considering investing in a company what ratio would be the most important to you?  Formulate and argument to defend your position

Working Capital

Working capital is computed with by subtracting current liabilities from the current assets. The working capital explains the cash available to the company. The cash is the bloodline of the company and if the current assets do not exceed the current liabilities of the company, it might face trouble in paying back to the creditors and meeting operational expenditures which might incur on short notice. The shortage of cash might push the company on the verge of liquidity crisis as creditors might ask for the payments by selling the assets of the company if it is depriving of cash. Working Capital has immense importance in the eyes of the investor because an investor will not select the company which might go bankrupt because of non-payment (Lewellen, 2004).

Current Ratio

The current ratio explains the ratio of current assets against the current liabilities. The ratio tells whether the company has current assets to pay up the current liabilities. Current ratio is an important aspect which needed to be covered because company should be maintaining the ratio of 1:1 or 1:2 in order to compensate for the liabilities which are placed against the current assets of the company. Investor includes the current ratio while making the investment decision but it does not carry immense importance because the nature of the industry in which the business operates determines the current ratio interpretation and evaluation. Companies which have advance bookings have relatively low ratio, or companies ...