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 liabilities should be compared to the current assets. The current liabilities of a company should be less than the current assets of the company so that the company is able to pay off its short term obligations.
One way to compare the current assets to the current liabilities is current ratio.
A high current ratio is a good occurrence as it shows that the company is managing its liquidity well. There are however exceptions to this where current ratio may be a small number but, the company is still healthy, due to the company’s ability to manage its working capital well.
Company A has 10 million in current assets. However, it has 15 million in current liabilities.
Company B has 10 million in current assets and 3 million in current liabilities.
Company A and company B has the same amount in current assets.However, company A’s current assets are less than its current liabilities. From the very little information that we know about these 2 companies, company A has a poorer financial health. However, the company’s overall financial health must be studies in totality. If company A is in the midst of selling off a building it owns in the next 6 months for a profit of 100 million, company A would definitely be able to pay off its short term obligations and on top of that, pay a special dividend to its shareholders.
Read: Long-Term Liabilities