Current Ratio

The Current Ratio = Current Assets/Current Liabilities.

The current ratio measures the amount of assets that the business expects to turn into cash within one year relative to its financial obligations over the one year cycle.

There are some issues to bear in mind when applying the Current ratio.

When a business increases both current assets and current liabilities by an equal amount, the ratio decreases if the ratio was greater than 1.0 before the change, and increases if the ratio was less than 1.0 before the change. Similar changes occur in the reverse direction if the company decreases assets and liabilities by the same amount.

The current ratio can be "massaged" by management, by for example modifying payments on account to change the current ratio.

Software Links

Windex More Info

Reference Pages

Quick Ratio

Solvency