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:
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
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