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Significance of Current Liabilities to Investors and Creditors

Name

Institution Affiliation
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Usually, liabilities, specifically the current liabilities are regarded as important tools for

assessing the financial health of the business which is critical in the decision-making process of

both creditors and investors. Claim to assets is represented by liabilities and this means that

companies must be able to generate adequate cash to meet all obligations (Hoyle & Open

Textbook Library, 2015). Additionally, it is critical that businesses are able to pay their debts as

they are due as failure to do so damages the reputation of the business and even the possibility of

obtaining credit. There is no other important decision to a business or other stakeholders,

specifically creditors and investors than assessing how well a business is versed financially

which is an important indicator of future success.

Generally, higher amounts of current liability compared to the amount of reported assets

shows that the enterprise is in a riskier financial position. It becomes a cloudy situation for any

business when the size of its total liabilities starts to approach the size of business assets (Hoyle

& Open Textbook Library, 2015). It is even more worrying when it is the current liabilities that

are in question because it means that the company must meet its obligations in the near future.

Sufficient amounts of cash must be available urgently within days or weeks and it is therefore

unsurprising that analysts who wish to invest or lend the firm must be concerned when current

liabilities approach current assets. It reveals that the company might not be able to meet its

obligation when they are due. To the extreme, the firm might be forced to bankruptcy. Current

ratio is one of the most important tools that are used to assess the ability of an organization to

meet its obligations. It is calculated by dividing current assets by current liabilities (Hoyle &

Open Textbook Library, 2015). Through this ratio, investors and creditors know how well the

business can meet its obligations.

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References

Hoyle, J. B., & Open Textbook Library,. (2015). Financial accounting. Minneapolis, Minnesota :

University of Minnesota Libraries Publishing, Minneapolis : Open Textbook Library