# Current Ratio

Current ratio is a type of liquidity ratio which is established by dividing total current assets of a company with its total current liabilities. It shows the amount of current assets available with a company for every unit of current liability payable

This ratio helps to determine the short-term financial liquidity of a company which means it indicates how easily the company can meet its short-term financial obligations. It also aids to find out the relationship between current assets and current liabilities of a business

## Formula to Calculate Current Ratio

Current Assets:  It includes Cash & its equivalents, B/R, Inventory, Marketable Securities, Debtors, Loans and Advances, Pre-Paid Expenses etc.

Current Liabilities: It includes Creditors, B/P, Accrued Expenses, Provisions, Short-Term Loans etc.

## Example of Current Ratio

From the balance sheet of Unreal corporation calculate their current ratio

 Liabilities Amt Assets Amt Share Capital 2,00,000 Plant & Machinery 1,90,000 Reserves & Surplus 40,000 Furniture 10,000 Short-Term Loans 25,000 Inventories 60,000 Trade Payable 25,000 Trade Receivable 30,000 Expense Payable 10,000 Short-Term Investment 10,000 Total 3,00,000 Total 3,00,000

Calculation:

Current Assets/Current Liabilities

Inventories + Trade Receivable + Short-Term Investment / Short-Term Loans + Trade Payable + Expense Payable

= (60,000 + 30,000+ 10,000) / (25,000 + 25,000 + 10,000)

= 1,00,000 / 60,000

= 1.67

It shows that for every 1 unit of current liability payable the company has 1.67 units of current assets. An ideal no. for this ratio lies around 1.5 to 2.0 depending upon the kind of business.

## High & Low Current Ratio

Higher the current ratio better the short-term strength of a company, but a deeper analysis of this ratio may also suggest problems such as poor working capital management, stock pile up, inadequate credit management etc. anything above 2:1 could be considered as high.

On the other hand, a lower current ratio may indicate inadequate working capital & show that the company isn’t sound enough to meet its short-term financial obligations comfortably. A business with low levels may be seen as depending a lot on current liabilities. Anything below 1:1 may be considered as low.