Teh Chad

As my particular writing style is more founded in brevity, I decided to put both of these in one post.

The current ratio is a simplification of a business’s ability to take care of the liabilities that will come due in the near future.  Most companies see the term “current” as relating to the next year.  The current ratio is the amount of current liquid (again, in the next year) assets divided by the current liabilities.

The current ratio varies, of course, from company to company.  Today, April 28th 2010, here are a couple of companies and their current ratios from internet sources: IBM 1.4:1, Microsoft 2:1, Red Hat 1.8:1.  It appears, from this ratio alone, that these companies will not have too many problems paying their bills in the coming months.  A company with a current ratio of less than one, say 0.3:1, might consider raising some capital by doing things like selling some stock or maybe some of their longer-term assets.  They might also consider looking at options to get rid of some of their current liabilities.

The profit margin is something that most people understand and speak of frequently.  Calculating the profit margin is also relatively simple.  Profit is equal to net income divided by sales.  This is really a simple picture of how a company can keep costs down.