Quick Summary
Current Ratio compares current assets to current liabilities to assess short-term liquidity.
The Current Ratio is a liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year. It indicates how well a company can cover its short-term liabilities with its short-term assets.
Current Ratio Formula
Current Ratio = Current Assets / Current Liabilities
Example
If a company has:
- Current Assets: ₹150 lakhs (Cash ₹50L + Inventory ₹60L + Receivables ₹40L)
- Current Liabilities: ₹100 lakhs
Current Ratio = ₹150 / ₹100 = 1.5:1 or simply 1.5
Interpretation
- Ratio > 2: Very strong liquidity position
- Ratio 1.5-2: Healthy liquidity
- Ratio 1-1.5: Adequate, but monitor closely
- Ratio < 1: Potential liquidity problems
Limitations
- Includes inventory which may not be easily convertible to cash
- Does not consider timing of cash flows
- Varies by industry (retail may have lower ratios)
- Very high ratio may indicate inefficient use of working capital
Key Points
- Measures short-term liquidity
- Current Assets / Current Liabilities
- Ideal range: 1.5 to 2.0
- Below 1 indicates liquidity risk
- Industry benchmarks vary