Short-term trade payables are primarily interested in the liquidity ratio known as the "Current Ratio." The Current Ratio is a financial ratio that measures a company's ability to pay off its short-term liabilities (including trade payables) with its short-term assets. It is calculated by dividing current assets by current liabilities.
Current Ratio = Current Assets / Current Liabilities
Trade payables (also known as accounts payable) represent the money owed by a company to its suppliers or vendors for goods or services purchased on credit. These payables are typically considered short-term liabilities since they are expected to be paid within a year. By looking at the Current Ratio, trade payables can assess the company's ability to meet its short-term obligations using its current assets, which include cash, accounts receivable, and other assets that are expected to be converted into cash within a year. Trade payables are concerned about the Current Ratio because it indicates whether the company has enough short-term assets to cover its short-term liabilities. If the Current Ratio is higher than 1, it suggests that the company has sufficient current assets to pay off its current liabilities. A ratio below 1 may indicate liquidity issues and raise concerns among trade payables about the company's ability to meet its obligations promptly. In summary, trade payables are interested in the Current Ratio as it provides insight into a company's liquidity position and its ability to settle short-term obligations, including amounts owed to trade creditors. |
