Working Capital Research Paper Example | Topics and Well Written Essays - 250 words

Working Capital - Research Paper Example If the current asset of the firm was less than the current liabilities, this will mean that the firm has a deficit working capital and the firm will not be in a position to convert its asset into cash even if the company is making profits. (Livingstone 2002) It is defined as the company’s ability to meet its short term obligations. These means that the higher the ratio the more liquid is the firm. The current ratio of a firm is calculated as a current asset divided by the current liabilities, the interpretation on these is that if the current asset of a firm is twice the current liabilities, then the firm is considered to have a significant good short term financial strength. But if the firm’s current asset are less than the current liabilities of the firm, then the result will be a firm having a problem in meeting its short term financial problem. Therefore, looking at the balance sheet of superior company the current ratio is as follows 1.97 in 2001, 1.95 in 2002, 1.83 in 2003 these shows that the company is in a position of meeting its short term financial obligation for the ratio is a positive figure and the current asset are approximately twice the current liabilities. These are short term loan and have a short maturity usually one year or less, in the balance sheet these amounts are indicated along the current liabilities section. They are mainly due within a year, if a company has more short term debt than the cash or investment to cover the bed payment then the firm will be forced to apply for more debt and this will be disadvantageous for the firm financially. (Droms 1990) Based on the presented balance sheet of superior company its short term debts are 1,200 in 2001, 1,300 2002 and 1,450 in 2003. Meaning therefore, the firms short term debt are less than the cash of the company and hence, the company has no intention of acquiring more debt for it is able to finance for the debt it has. These are