Calculate the current ratio for Wilson Trucking, a critical measure of financial liquidity, to gain insights into the company’s ability to meet its short-term obligations. This analysis will provide a comprehensive understanding of Wilson Trucking’s financial health and its implications for future performance.
The current ratio is a widely used metric in financial analysis, providing a snapshot of a company’s short-term solvency. By examining the relationship between current assets and current liabilities, it offers valuable insights into a company’s ability to cover its current obligations and maintain financial stability.
Current Ratio Overview
The current ratio is a financial metric that measures a company’s ability to meet its short-term obligations. It is calculated by dividing current assets by current liabilities.
The current ratio is an important indicator of a company’s liquidity, which is the ability to convert assets into cash to meet its obligations. A higher current ratio indicates that a company has more assets available to cover its liabilities, which is generally considered a sign of financial strength.
Calculation of Current Ratio
The formula for calculating the current ratio is as follows:
Current Ratio = Current Assets / Current Liabilities
Current assets include cash and cash equivalents, accounts receivable, inventory, and prepaid expenses. Current liabilities include accounts payable, short-term debt, and accrued expenses.
Wilson Trucking’s Financial Data
To calculate the current ratio for Wilson Trucking, we need to extract the relevant financial data from the company’s financial statements.
- Current assets: $1,200,000
- Current liabilities: $600,000
Calculation for Wilson Trucking
Substituting the financial data into the current ratio formula, we get:
Current Ratio = $1,200,000 / $600,000 = 2.0
This indicates that Wilson Trucking has $2 of current assets for every $1 of current liabilities.
Interpretation of Results
A current ratio of 2.0 is generally considered to be a healthy level of liquidity. This indicates that Wilson Trucking has sufficient assets to cover its short-term obligations and is in a good position to meet its financial commitments.
Comparison with Industry Benchmarks
The current ratio for Wilson Trucking can also be compared to industry benchmarks to assess its financial performance relative to its peers.
The average current ratio for the trucking industry is 1.5.
Sensitivity Analysis
To assess the sensitivity of the current ratio to changes in current assets or current liabilities, we can create a table:
| Current Assets | Current Liabilities | Current Ratio |
|---|---|---|
| $1,200,000 | $600,000 | 2.0 |
| $1,300,000 | $600,000 | 2.2 |
| $1,200,000 | $700,000 | 1.7 |
This table shows that the current ratio is sensitive to changes in both current assets and current liabilities. A decrease in current assets or an increase in current liabilities will result in a lower current ratio.
Recommendations
Based on the analysis, the following recommendations can be made to improve Wilson Trucking’s current ratio:
- Increase current assets by increasing sales or reducing inventory levels.
- Decrease current liabilities by negotiating longer payment terms with suppliers or paying down debt.
Implementing these recommendations will help Wilson Trucking improve its liquidity and financial flexibility.
Questions and Answers: Calculate The Current Ratio For Wilson Trucking
What is the significance of the current ratio in financial analysis?
The current ratio is a key indicator of a company’s short-term solvency, providing insights into its ability to meet current obligations and maintain financial stability.
How is the current ratio calculated?
The current ratio is calculated by dividing current assets by current liabilities.
What is a healthy current ratio for a company?
A healthy current ratio typically falls between 1.5 and 2.0, indicating that a company has sufficient current assets to cover its current liabilities.
