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Importance of Current Assets and Current Liabilities

When you study the figures of a target company it is worth examining its current assets and current liabilities.

Current assets represent assets that can be quickly transferred into money. Some of them are:

Cash
Cash equivalents
Inventories
Accounts receivable (these are the money that customers owe to the company for services or products provided)

Current liabilities represent the short term obligations of the company. Some of them are:

Accounts payable
Short term debt

Current assets and current liabilities should be compared over periods of time. It is good if the current assets have increased significantly over longer periods of time. This means that the company generates cash. On the other hand, it can be also interpreted as the company not being able to collect the money it has to take from its accounts receivable. If the current liabilities of the company are growing at a fast pace, then there might be some problem with the company. However, this is not always bad since the company may incur higher liabilities since it needs money to finance some of its goals.

Finally, you should carefully study these indicators of the target company in order to determine its future potentials. You can quickly and easily obtain this information from financial statements.

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