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Current Ratio


What is Current Ratio?

Current Ratio is the most widely used ratio. It compares a firm’s current assets to its current liabilities. It shows a firm’s ability to cover its current liabilities with its current assets. It is expressed as follows:

current ratio

For example, if ABC Company’s current assets are Rs. 50,000,000 and its current liabilities are Rs. 20,000,000, then its current ratio would be

current ratio 1
It means that for every Rupee the company owes in the short term it has Rs. 2.5 available in assets that can be converted to cash in the short term.

  • A current ratio of assets to liabilities of 2:1 is usually considered to be acceptable i.e., current assets should be twice of the current liabilities.
  • If the current assets are twice of the current liabilities, there will be no adverse effect on business operation when the payment of current liabilities is made.
  • If the ratio is less than twice, difficulty may be experienced in payment of current liabilities and day-to-day operations of the business may suffer.
  • If the ratio is higher than 2, it is very comfortable for creditors but for the concern, it is indicator of idle funds and a lack of enthusiasm for work.

 

NEXT – Liquidity Measurement Ratios: Quick Ratio
Table of Contents
1) Liquidity Measurement Ratios: Introduction
2) Liquidity Measurement Ratios: Current Ratio
3) Liquidity Measurement Ratios: Quick Ratio
4) Liquidity Measurement Ratios: Cash Ratio