Current Assets and Liabilities

The cover story in your latest issue on the relevance of value investing was simply bona fide. A particular criterion for stock selection using value investing principles was that current assets should be at least two times the current liabilities. Could you elucidate the same? -

- Parul Agarwal

Editor Responds: We appreciate your query and are pleased to hear that you found our cover story in the recent issue fruitful. Current assets are those assets of a company that are expected to be sold or used as a result of standard business operations over the next year. These include cash, cash equivalents, accounts receivable, inventory, marketable securities and other liquid assets. Current liabilities are a company’s short-term financial obligations that are due and expected to be settled within the next one year. These include accounts payable, short-term debt, dividend payable and tax payable and are typically settled using current assets. If a company has current assets at least two times its current liabilities, it illustrates that the company is highly capable of remaining solvent for a longer period and will rarely face problems to meet its short-term financial obligations. Hope this helps. Keep writing to us!