Alright, let's discuss one of the most common ratios, the current ratio and a related concept of working capital. So, let's start here with the current ratio. The current ratio is the most common liquidity ratio. When we talk about liquidity, remember, the liquidity of assets is how easily they can be converted to cash. And we're going to be talking about our current assets and our current liabilities here. So, this is basically dealing with being able to cover our current liabilities. So, let's think about it. The current ratio, here we have the formula right here. We have current assets divided by current liabilities. Okay? So remember, current assets are all of our assets that are cash or converted into cash within 1 year. And current liabilities, well, that's money we're going to have to pay out within 1 year. Okay? Liabilities coming due within the next year. So, let's think about what the current ratio tells us. Remember, when we think about a ratio, we're thinking about for each dollar of the bottom number, so for each one unit or $1 of the bottom number, so for each dollar of current liabilities, how many current assets do we have? What do you think? Do you think we would want to have more than $1 of current assets per dollar of current liabilities or less than $1 of current assets per dollar of current liabilities? Well, we would want to have more current assets, right? We would want to have enough current assets to cover our upcoming payments that we have to make, right? These current liabilities are going to be due within the next year. Well, we better have enough money to cover all of those. So that's what we use the current ratio for is to kind of see this relationship. So it tells us how many dollars of current assets are available for each dollar of current liabilities. Cool? So a current ratio below 1.0, right? Below 1, well, it's generally a sign of liquidity problems, right? Because that means you have less than $1 of current assets for each dollar of current liabilities. Okay?

So now that we've discussed the current ratio, let's move on to working capital and you'll see how similar these concepts are. Where working capital really isn't technically a ratio, right? It's not technically a ratio because we're not dividing one number by another. Alright, sorry about that. But it's still a useful financial analysis tool that is still calculated all the time. So working capital, well we're using those same numbers. We're talking about current assets minus current liabilities in this case, right? Before we were dividing the two, well now we're just subtracting the two. And what do you think? Do you think we want positive working capital or negative working capital? We generally want positive working capital, right? We want those current assets to be more than our current liabilities. So when we see positive working capital, well, that indicates short term stability. Right? We're able to cover our upcoming liabilities in the short term. Now, what we're going to see is when we have negative working capital, just like when we have a current ratio under 1, right? A red flag here is if we see negative working capital, well that's going to indicate short term problems, right? Short term financial problems because we're going to see that. We don't have enough current assets to cover up those upcoming liabilities. We might have to sell some of our fixed assets, right? What it might be, we might have to take on more long term debt to take to cover our liabilities. Whatever it is, that negative working capital could be a sign of problems, alright? Also, another thing to think about is if you have some huge amount of working capital, like a really high amount of working capital, it could mean you're inefficiently managing your assets, right? You have just way too many assets for the amount of current liabilities. You could be maybe investing more in fixed assets and your long term assets. Maybe you're just sitting on a bunch of cash and you're not using it, right? The cash isn't making you any money. It's just sitting there. Well, there could be better uses for it, right? So let's go ahead and do an example here and then you guys could practice calculating the current ratio and working capital. So let's start here with the current ratio. And one thing I want to note, whenever you're doing ratio problems, they're generally pretty simple, especially when they come up on a test. These are like free points. All you have to do is remember the ratio and it's as simple as just dividing two numbers or something like that. On a test, you generally don't have to do too much analysis of ratios. It's mostly just calculating. Now if you have some projects in your class where you're using a bunch of ratios and doing financial analysis of a company, well then it might be more important to focus on the analysis side. But as far as test-taking goes, most of it's just as easy as calculating the numbers. So let's try this example. Super Liquid Company has current assets totaling 450,000 and current liabilities totaling 315,000. Calculate the current ratio and working capital for SLC. This couldn't be any easier, right? They told us the current assets, they told us the current liabilities, and you can expect sometimes you get questions that are this easy. How bad would it be to lose points on something like this? So let's go ahead and start with our current ratio. So current ratio, well, remember, we have our current assets. I'll put c for current assets over current liabilities, right? Assets on top, liabilities on the bottom there. And how do we do it? 450,000 divided by 315,000. Not much better there. Well, what's that give us? 450 divided by 315. Right? And you could just do 450 divided by 315. Right? It'll give you the same answer. Take off those zeros. So we get a current ratio of 1.43. I'll round it off to 2 decimals there. So 1.43. Like we saw above, a good analysis point is, are you able to cover your current liabilities and that's to see a current ratio above 1. So this is a good sign that this company is in a position to cover their upcoming liabilities. Cool? Let's go ahead and do working capital now. So working capital, we're using the same data except now we're subtracting, right? It's going to be our current assets of 450,000 minus current liabilities of 315,000, right? And we just do that 450 minus 315 and it gives us 135,000 as working capital. So that means we have in a dollar amount, right? This is a dollar amount right here. It tells us that we have 135,000 more dollars of current assets than current liabilities. Cool? Alright. So that's about it there. Let's go ahead and pause and you guys can try the next one in the practice problem, alright? Let's do that now.