Ratio of Current Assets to Shareholders Funds

Ratio of current assets to shareholders funds is the relationship between all current assets and shareholder's funds. For example, our total current assets are $ 1,00,000 and our total shareholder funds are $ 4,00,000. At that time, this ratio will be

= Current assets / shareholders' funds X 100

= 1,00,000/ 4,00,000 X 100 = 25%

This ratio tells us, how much money of shareholders did company's management  invest in current assets. Shareholder can get both items from current balance sheet. It is not wrong to invest shareholders money in current assets. But after a limit, it is not good to invest in short term or current assets because

(A) Current assets provides use short term profit but our commitment for shareholders are to provide earning long period.

(b) If we keep current assets in cash in hand, at that time, this cash will not generate any profit. At that time, it will be risky for company to suffer cost of equity capital.

(c) Some current assets are debtors and bill receivables. More investment of shareholder fund in these assets are risky because there is not any security of these assets. So, if any account manager sees current assets to shareholders funds ratio at very high rate, he or she should go to deep by calculating sundry debtors to shareholders fund ratio to know the exact % of shareholders funds which has been invested in debtors. Debtors who will not pay us, may easily becomes bad debtors and this loss will not company but this loss will be of shareholders. With this, money of shareholders will decrease. Result you can see in the share market. Rate of share market will decrease.

Related : Analysis of Long Term Solvency

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Accounting Education: Ratio of Current Assets to Shareholders Funds
Ratio of Current Assets to Shareholders Funds
Accounting Education
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