Current Assets

The current assets are short term assets that can be converted to cash readily within 12 months. The current assets consists of cash, marketable securities, accounts receivables and inventory.

If the current assets in the company are greater than the current liabilities, it signifies that the company is able to pay off any short term obligations. These short term obligations are reflected the the company’s current liabilities.




One of most important items on the current assets is cash. A company without cash may cease to be a going concern going forward. At times, an abundant cash tells an investor or a trader that the company is doing a good job managing the business. As an example, company A is debt free and has a market capitalisation of 30 million. On its balance sheet, the company has 40 million of cash and cash equivalents and is earning an average net income of 5 million a year. This is an example where a company may be considered undervalued. This is because private investors could buyout  the company as it has cash resources exceeding the market capitalization of the company. So private equity players may take a loan and make an offer for 35 million for the entire company, and after the acquisition has been completed, use the company’s cash resources to pay off its $35 million loan. After which, the private investors are free to enjoy whatever cash flows the business can produce.

Of course this is an oversimplified example but scenarios like this do occur quite frequently in the market. The current assets should be studies with the current liabilities and the balance sheet as a whole to come to a conclusion that a company is financially healthy. Looking at the current liabilities alone is not enough.




The current ratio is the ratio of current assets to current liabilities. An investor would want the current ratio to be healthy so that the company can easily pay off its current obligations. As a rule, only invest in companies with a current ratio of 2 or more and consider other factors as well.

Read : Current Liabilities

 

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  • Net Assets The net assets in a company is equivalent to the total assets less total liabilities. This is normally the term used in a mutual fund, ETF or REITS. The net...
  • Current Liabilities The current liabilities reflects obligations that have to be paid in 12 months. The current liabilities consist of accounts payable, short-term debt and principal and interest on long-term debt. The...
  • Current Ratio The current ratio can be calculated as: Current assets divided by  Current liabilities Significance of  the current ratio The  current ratio measures the company’s ability to pay its short-term obligations...
  • Total Assets The total assets in the company is made up of short-term assets and long-term assets. On its own, this figure does not reveal much. It must be compared to the...