# Current Ratio

__Definition Current Ratio__

It’s a type of ratio that tells the company's ability to meet the short-run debt obligations or those due within one year. This ratio measures the capacity of a company to pay off its short-run liabilities (payable, etc.) by liquidating its short-run assets (cash, inventories, etc.)

__Formula:__

__View: __

__View:__

, then Ratio is greater than 1 then a favorable situation to be in.__Current Assets > Current Liabilities__, then Ratio is equal to 1 then Current Assets are just enough to pay down its short term obligations.__Current Assets = Current Liabilities__, then Ratio is less than 1 then a problem situation at side as the company does not have enough to pay for its short term obligations.__Current Assets < Current Liabilities__

__Where to find the data?__

__Where to find the data?__

** Current Assets: **In the balance sheet of the company in the current assets.

** Current Liabilities: **In the balance sheet of the company in the current liabilities.

__Pros And Cons Of Current Ratio__

__Pros And Cons Of Current Ratio__

__Pros:__

__Pros:__

It helps to understand how cash rich a company is. Also it help us in short-term financial strength of a company. Higher the ratio give more stability in the company is. Lower the ratio show greater is the risk of liquidity with the company.

It gives an view of a company operating cycle. It also help in understanding how efficient the company is in selling off its products. Thats how company is quickly able to convert its inventory or current assets into cash.

It shows the management’s efficiency in meeting the creditor’s demands. It also gives an understanding of working capital management or requirement of the company.

__Cons:__

__Cons:__

It includes inventory in the calculation, which may lead to overestimation of the liquidity position in many cases.

In some companies where sales are seasonal and possibility to reduced current ratio in some months and increased ratio in the other.

__Example:__

1) *Current Assets = 134,836,000 *

*Current Liabilities = 125,481,000*

*Cash & Cash Equivalents = 34,940,000*

*Account Receivables = 51,506,000*

*Short-Term Investments = 27,699,000*

**Solution:-** Current Assets/Current Liabilities

*= 134,836,000/125,481,000*

*=1.07*