Till now we have seen the important valuation ratios that help you decide whether the stock is worth buying or not. Now let us take a look at the operational efficiency of the company. It highlights how effectively the company is able to run its business. The first ratio that we look at the Current Ratio.

This ratio tells you the amount of liquidity available with the company in order to fulfill its business commitments. It is obtained by dividing the current assets (those assets that can be quickly sold off to get cash) by its current liabilities (immediate debts).

Current ratio=Current assets ÷ Current liabilities

Usually, if the current ratio of 2:1 for a stock is regarded as suitable, since it gives a sufficient safety margin to the company in order to fulfill its operating cash requirements. If the current ratio is low, the company may have to raise money from other sources like borrowing from lenders both individuals and financial institutions or distribute new equity for fulfilling their commitments.

But if the ratio is very high, it implies the company is not using its assets optimally. It is just sitting on its assets. This can significantly affect the company’s long-term returns. Compare the current ratio of the company you are interested in with that of its rivals.