How to use the current ratio when evaluating a stock

This article will tell the reader how to calculate a company's current ratio and exactly what this figure tells the investor about the company.

Difficulty: Easy

Instructions

Things You'll Need:

• Any company's Balance Sheet.

1. The first thing that you will need to do is obtain a company's balance sheet. Lets say that you wanted to calculate Wal-Mart's current ratio. An easy way to get their balance sheet is to go to www.yahoo.com and type in their ticker symbol in the quote area. On the left side of the page is a list of different pieces of data about the company. Under the Financial tab click "Balance Sheet". Next Click the Annual tab at the top.

2. Now we need to introduce the Current Ratio formula. It is as follows:
   
   Current Assets / Current Liabilities

3. This step is easy. On the Balance Sheet find the Total Current Assets title and get their latest value recorded. Now under the Liabilities section locate the Total Liabilities section and get the latest value recorded. Now just plug these values into the formula discussed above. For example here is WMT's current ratio:
   
   47,585,000 / 58,454,000 = .8140 (Current Ratio)

4. Now we need to understand what this figure means. Simply Put this figure tells us that Wal-Mart can convert their current assets to cash and pay off about 81% of their current Liabilities.

5. You might be asking yourself "Is this Good?" Now you might want to evaluate what some of WMT's competitors current ratio's are. Costco has a current ratio of 1.058 and Target has a Current Ratio of 1.529. Both of these companies can pay off all of their current liabilities and still have current assets left over. In this evaluation Target has the most favorable current ratio because they can pay off their liabilities a little over 1.5x with their current assets. Remember to always compare a companies current ratio to other companies within the same industry. In this example Wal-Mart would still have about 18-19% of their current liabilities remaining they used their current assets to pay off their obligations.

[pappy537]

on 8/15/2008 This is very good to use when I am evaluating a company to trade. Its a buyers market the moment and I can use this. Thanks