Quick Ratioīuilding from the current ratio is the quick ratio, also referred to as the acid-test ratio. This means that, right now, John has more current assets than his current liabilities and might be considered a lower risk to a lender. John owns a small construction firm and finds the following figures from his balance sheet: Current assetsīased on these numbers, John has a current ratio of 2.0. Let’s take a look at an example of a current ratio. In other words, an excess of short-term assets (like cash) might be sitting idle instead of gaining interest as long-term investments. Too high of a ratio could indicate inefficient use of working capital. So is bigger always better? Not necessarily. A ratio of less than 1.0 could indicate potential financial trouble. Some construction experts might encourage a current ratio of 1.3 or greater. This means that there are enough current assets in the business to cover the cost of current liabilities. Generally, a current ratio of greater than or equal to 1.0 is considered good. The current ratio, sometimes called the working capital ratio, is the result of dividing all current assets by all current liabilities. In the event that all short-term liabilities suddenly became due, liquidity ratios provide a glimpse as to whether your company would be able to cover those debts. Liquidity ratios determine a company’s ability to pay off short-term debts using available assets. In this article, we'll explore some of the more common sets of financial ratios and how you can use them to measure the performance of your business within the construction industry. Understanding how to calculate and read financial ratios can also help you predict future outcomes for your business - like whether you might get approved for a loan or whether you could be heading toward cash problems! That’s where financial ratios come in.įinancial ratios are key equations you can use to sort through your numbers and get a clearer look at how well your construction business is performing. Between balance sheets and profit-and-loss (P&L) statements, it’s not always clear what all of these numbers are supposed to mean for the health of your company. Their average total assets would then be the sum of the two ($16,000,000) divided by 2, which is $8,000,000.For contractors, the amount of metrics to gauge the effectiveness of your construction business can be overwhelming. For example, the company in the previous example might have assets of $7,500,000 at the beginning of the year and $8,500,000 at the end of that year.You can make a more specific analysis of asset utilization by only including assets directly used in production, such as plant equipment and property. X Expert Source Alan Mehdiani, CPAĬertified Public Accountant Expert Interview. Total assets should be stated on the business's balance sheets for each period. Total assets includes all assets held by the business, including cash and cash equivalents, fixed assets, receivables, and others. It can be calculated by adding the total assets at the beginning of the period plus the total assets at the end of the period and then dividing the total by two. Average total assets represents the total assets held by the business over the period in which asset utilization is being calculated.
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