It can meet its current debt obligations and have a little left over. The following figures have been taken from the balance sheet of GHI Company. In order to stay solvent, the firm must have a current ratio of at least 1.0 X, which means it can exactly meet its current debt obligations. Whereas an increase in the denominator (current liabilities) decreases the same and vice versa. A current ratio of 2:1 is considered a lenient liquidity position and 1:1 would be too tight. It is a common measure of the short-term liquidity of a business. Interpreting the Current Ratio.. Theoretically, a high current ratio is a sign that the company is sufficiently liquid and can easily pay off its current liabilities using its current assets. Interpretation of Current Ratio. Current assets are assets that are expected to be converted to … The quick ratio (or acid-test ratio) is a more conservative measure of liquidity than the current ratio.
In the above example, XYZ Company has current assets 2.32 times larger than current liabilities. Current ratio is a measure of liquidity of a company at a certain date.
Current Ratio: The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations. The current ratio—sometimes called the working capital ratio—measures whether a company’s current assets are sufficient to cover its current liabilities. Current ratio measures the current assets of the company in comparison to its current liabilities. For example, a ratio of 1.5:1 would mean that a business has £1.50 of current assets for every £1 of current liabilities.
Quick ratio = (Current assets – Inventories – Prepayments) ÷ Current liabilities.
In the current ratio, an increase in the numerator (current assets) increases the ratio and vice versa. In other words, for every $1 of current liability, the company has $2.32 of current assets available to pay for it. If Current Assets > Current Liabilities, then Ratio is greater than 1.0 -> a desirable situation to be in.
It equals current assets divided by current liabilities.
Current ratio is a liquidity ratio which measures a company's ability to pay its current liabilities with cash generated from its current assets. The current ratio is probably the best known and most often used of the liquidity ratios, which analysts and investors use to evaluate the firm's ability to pay its short-term debt obligations, such as accounts payable (payments to suppliers) and taxes and wages.
The ratio is used by analysts to determine whether they should invest in or lend money to a business. It compares a firm's current assets to its current liabilities, and is expressed as follows: Current ratio = Current Assets Current Liabilities. The current ratio is the classic measure of liquidity. Example. A higher number indicates better short-term financial health, and a ratio of 1-to-1 or better indicates a company has enough current assets to cover its short-term liabilities without selling fixed assets. If you calculate the current ratio for 2017, you will see that the current ratio was 1.182 X. The results of this analysis can then be used to grant credit or loans, or to decide whether to invest in a business. The business currently has a current ratio of 2, meaning it can easily settle each dollar on loan or accounts payable twice.