Saudi Electronic University The Current Ratio Discussion
Saudi Electronic University The Current Ratio Discussion
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The current ratio
The current ratio is a liquidity ratio that measures a company’s ability to pay off short-term obligations or those due within one year. The current ratio is called current because it includes all current assets and current liabilities (Fernando, 2021). The current ratio is sometimes called the working capital ratio. The current ratio reflects its ability to generate enough cash to pay off its debts as soon as they become due. It is used globally to measure a company’s overall financial health (Seth, 2021). The current ratio helps investors and creditors understand the company’s liquidity and how easy it is to pay its current obligations. This ratio expresses the company’s current debt in terms of current assets (Fernando, 2021).
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While the range of acceptable current ratios varies depending on the specific type of industry, a ratio between 1.5 and 3 is generally considered healthy. A ratio value of less than 1 may indicate liquidity problems for the hospital. However, the company may not face a severe crisis if it can secure other forms of financing (Seth, 2021). Saudi Electronic University The Current Ratio Discussion
The current ratio is a critical liquidity ratio widely used by banks and other financial institutions while providing loans to hospitals. To improve the current ratio, management needs to focus on different strategies, including current liabilities and assets that are not one-time activities. The hospital has to monitor it throughout the year (Borad, 2021). The rapid circulation of funds by debtors will keep the current ratio in check. At least, the ratio will show the correct picture if debtors are liquid. Continuous follow-up with debtors can improve collection from them. The payment terms should be clarified in the first transaction itself, and the credit period should be negotiated as low as possible (Borad, 2021).
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The current ratio depends not only on the current assets but also on the current liability representing the denominator. It should be paid back often and as soon as possible. It will reduce the level of current liabilities and thus improve the current ratio. Early payments to creditors can save on interest costs and earn discounts that directly impact hospital profits (Borad, 2021). The level of cash can be increased by selling unused fixed assets. Otherwise, money is unnecessarily blocked, and idle money accumulates interest costs (Borad, 2021). When current assets are financed through equity rather than creditors, the level of current assets will increase as current liabilities remain the same. Thus, this exercise will improve the current ratio. Given the current ratio optimization, graphics are not recommended. That is because the drawings will reduce the capital investment in existing assets. Thus, the level of current liabilities to finance the current asset will increase. All this directly affects the current ratio. In essence, the owners’ money, i.e., capital, reserves, and surpluses, must remain invested in the hospital to balance the current ratio (Borad, 2021).
References
Borad, S. B. (2021, November 23). How to Analyze and Improve Current Ratio? EFinanceManagement. https://efinancemanagement.com/financial-analysis/how-to-analyze-and-improve-current-ratio
Fernando, J. (2021, October 21). What Is the Current Ratio? Investopedia. https://www.investopedia.com/terms/c/currentratio.asp
Seth, S. (2021, March 31). What Is the Formula for Calculating the Current Ratio? Investopedia. https://www.investopedia.com/ask/answers/070114/what-formula-calculating-current-ratio.as
Financial Analysis
To avoid bankruptcy, solvency, and liquidity concerns, healthcare companies should enhance their current ratios. The purpose of this paragraph is to look into the best ways to improve King Abdulaziz Medical City – Riyadh’s present ratio and make it more liquid. In addition, the study looks into the issues of financial statement and operating indicator analysis.
Improvement Strategies
The current ratio of King Abdulaziz Medical City will be improved via loan amortization. The procedure necessitates deferring the hospital’s loan payback dates (Seth et al., 2020).As a result, the budget required for loan installments and repayments will be reduced. Cash spending delays are required to improve King Abdulaziz Medical City. Long-term cash payments should be preferred above short-term cash payments by the hospital (Seth et al., 2020).This will free up more cash for the facility’s expansion and operations. To increase its current ratio, King Abdulaziz Medical City could cut cash expenses. Activities that need extra cash payments should be avoided by the company (Secinaro et al., 2020).This comprises cash purchases of supplies, assets, or capital. Liquidating assets will also aid King Abdulaziz Medical City’s current ratio improvement. The company has the ability to transform its liquid assets into cash (Lejeune et al., 2019).For example, the hospital could sell shares to raise funds. Some healthcare expenditures are due to the wages of too many healthcare personnel. They can, however, work in shifts to reduce the number of physicians in the company and, as a result, save money on pay.
Experiencing Troubles
When examining financial statements and operational indicators, information distortion is a challenge. Financial statement data mistakes happen as a result of this (Das, 2019).As a result, the ratio and operational estimations produce erroneous results. Variable industry benchmarks are also a problem when evaluating operating indicators and financial statements. Operating indicators and financial measures are specific to each industry (Das, 2019). Consequently, a ratio may be beneficial to one market while being detrimental to another. The analysis of operating indicators and financial accounts is further hampered by a lack of information. As a result, in ratio and indicator analysis, financial analysts utilize projections and estimations (Bülüç et al., 2017).Finally, this has an impact on the analytical outcomes of indicators and ratios. Furthermore, an over-reliance on historical data has an impact on financial statement and operating indicator evaluation. The majority of businesses solely use historical data to calculate performance ratios (Secinaro et al., 2020) Some ratio and indicator estimations may reflect old or obsolete financial and operational performance of organizations. Saudi Electronic University The Current Ratio Discussion
In summary, debt amortization, deferring cash expenses, reducing cash expenses, and liquidating assets are all necessary to improve King Abdulaziz Medical City’s current ratio. When examining financial statements and operating indicators, however, obstacles include information distortion, varying industry benchmarks, a lack of data, inflation, and reliance on past data. Some healthcare expenditures are due to the wages of too many healthcare personnel. They can, however, work in shifts to reduce the number of physicians in the company and, as a result, save money on pay.
Reference
Bülüç, F., Özkan, O., & Ağirbaş, İ. (2017). ÜNİVERSİTE HASTANELERİNİN FİNANSAL PERFORMANSININ ORAN ANALİZİ YÖNTEMİYLE DEĞERLENDİRİLMESİ. Business & Management Studies: An International Journal, 5(2), 268–281. https://doi.org/10.15295/bmij.v5i2.93
Das, S. R. (2019). The future of fintech. Financial Management, 48(4), 981–1007. https://doi.org/10.1111/fima.12297
Lejeune, M., Lozin, V., Lozina, I., Ragab, A., & Yacout, S. (2019). Recent advances in the theory and practice of Logical Analysis of Data. European Journal of Operational Research, 275(1), 1–15. https://doi.org/10.1016/j.ejor.2018.06.011
Secinaro, S., Brescia, V., Calandra, D., & Saiti, B. (2020). Impact of climate change mitigation policies on corporate financial performance: Evidence-based on European publicly listed firms. Corporate Social Responsibility and Environmental Management, 27(6), 2491–2501. https://doi.org/10.1002/csr.1971
Seth, H., Chadha, S., Sharma, S. K., & Ruparel, N. (2020). Exploring predictors of working capital management efficiency and their influence on firm performance: An integrated DEA-SEM approach. Benchmarking: An International Journal, 28(4), 1120–1145. https://doi.org/10.1108/BIJ-05-2020-0251 Saudi Electronic University The Current Ratio Discussion
